We live in a world that offers greater mobility than ever before. This can result in a person having business interests and accommodation in more than one country. Each country will have its own rules to determine whether an individual is resident for tax purposes.
The UK is about to introduce a statutory test of residence from 6 April 2013. As now, a person who has previously been resident in the UK for tax purposes will remain so if they spend less than 183 days a year in the UK, but retain material ties with this country.
It is quite feasible to meet the domestic residency tests of two jurisdictions. Imagine a person who has previously been resident in the UK spends more than 183 days in a country abroad but whose working arrangements overseas do not satisfy the UK definition of full-time. That person would remain UK resident but could also be within the residency definition of the overseas country; becoming what is known as dual resident.
The UK has double-tax treaties with most countries in the world and the majority of these include a tie-breaker series of tests to determine where a dual resident person is 'treaty resident'. The tests are normally based on the OECD Model Agreement which sets out the following determining factors in descending order of priority:
- permanent home
- centre of vital interests
- habitual abode
- nationality.
If a person only has a permanent home in one country, that will be their country of treaty residence. If they have a permanent home in both countries, the next test to serve as the tie breaker will be the centre of vital interests; and so on. In practice, it is often the case that one country will be the prevailing centre of vital interests. Vital interests are measured by the stronger economic, cultural, social and domestic ties.
Where the tie-breaker tests point to a treaty residency elsewhere in the world, the taxpayer will be entitled to make a claim to relief in the UK. Specified overseas income and gains will be exempt from UK tax. It is necessary to complete a Claim under double taxation treaties, but this does allow limited reporting of non-UK income and avoids unnecessary calculations of what tax is covered by the relief.
Where an individual is dual resident they will remain entitled to the UK personal allowances, so using the treaty residency provisions will not prevent them claiming the personal allowance against UK income such as rental profits. UK source investment income is reportable and can be taxed, but only to the extent that such income can be taxed in the hands of a sole resident of the other state. Effectively, this means that the 20% withholding on interest and 10% tax credit on dividends is sufficient to discharge any UK tax liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.