Stranded in the UK and the consequences for tax residency and domicile.
Widespread restrictions on travel and the closing of some borders as a result of the current pandemic have left many individuals stranded in the UK unable to return home. Although we have entered into a new tax year, the lockdown currently shows no signs of easing and this may pose problems for individuals keen to be considered non-resident for UK tax purposes and for those concerned about becoming deemed domiciled.
An individual’s residence status is determined by the Statutory Residence Test (SRT). Broadly speaking, this test looks at the days spent in the UK and the connections (or ties) that an individual has in any given tax year. Therefore, an individual stranded in the UK may become tax-resident by virtue of being unable to leave the UK and exceeding their day count.
Why does this matter?
Amongst other issues, tax-resident individuals are subject to UK tax on their worldwide income and gains (unless the remittance basis, if available, is claimed). Non-UK tax residents are only subject to tax on their UK source income and gains related to UK residential property. Therefore, inadvertently becoming tax resident may result in a UK tax liability and a filing requirement in the UK.
How have HMRC recognised this issue?
Some provisions in the SRT allow for an individual to disregard certain days they have spent in the UK. The number of days which can be disregarded under ‘exceptional circumstances’ is limited to 60 per tax year.
In light of Covid-19, HMRC has updated its guidance and confirmed that the following should be considered ‘exceptional’:
- Quarantine or advice by a health professional or public health guidance to self-isolate in the UK as a result of the virus
- Receipt of official Government advice not to travel from the UK as a result of the virus
- Inability to leave the UK as a result of the closure of international borders, or
- A request is made by the individual’s employer for his temporary return to the UK as a result of the virus.
If travel restrictions continue past June 2020 (the 60 day ‘marker’ for this tax year) any subsequent days will count towards the day count, which may lead to UK tax residency being activated. If travel restrictions and the lockdown period continue, 60 days may not be enough, though no guidance on this has been issued by HMRC yet.
How does Covid-19 affect an individual’s domicile?
Domicile of choice:
Being stranded in the UK due to Covid-19 is unlikely to affect an individual’s domicile of choice in the short-term, unless their non-intention to permanently or indefinitely remain in the UK changes.
An individual will be deemed domiciled in the UK if they have been UK resident for 15 out of the previous 20 tax years. For individuals drawing near the 15 years’ residence mark, being unable to leave the UK may make them tax resident due to the additional days spent in the UK. However, as outlined above, up to 60 days may be ignored if the individual cannot leave the UK due to the outbreak.
Why does this matter?
If an individual becomes deemed domiciled, then on their death, their worldwide estate becomes subject to UK inheritance tax. If an individual avoids becoming deemed domiciled, then only his or her assets in the UK come within the scope of UK inheritance tax on their death. This would be of particular concern, for example, to individuals who have assets in jurisdictions with lower rates of inheritance tax or no inheritance tax regime at all.
Those concerned they may be in this position should contact us as soon as possible in order to put in place measures to help mitigate against this, such as a bespoke Will specifically dealing with the issue of domicile. We can also assist with any other cross-border inheritance tax planning concerns.
If you would like more information about the above, or require our assistance in relation to any other private client matter, Nicola Edmondson and Liz Jones of the Sherrards London Private Client Team are here to assist you.