The statutory residence test: what is it and why does it matter?

Understanding the Statutory Residence Test is crucial for determining your UK tax obligations. This comprehensive guide explains the three-step test that determines UK tax residency.

One of the fundamental questions that determines the extent to which an individual is subject to UK income tax and capital gains tax (CGT) is whether they are UK resident. This is determined by the Statutory Residence Test (the SRT). This blog post provides a high-level summary of how the SRT operates.

Why residence matters

If you are UK tax resident the starting point is that you are taxed on your worldwide income and gains unless you qualify for the FIG regime. By contrast, the starting point for a non-UK tax resident is that they are only subject to UK tax on their UK income and capital gains. For example, a non-UK resident would be subject to UK income tax on rent from a property in the UK but not on interest on a bank account in Dubai.

It is important to note that there are various exceptions to these rules. For example, an individual who does not cease UK tax residence for more than 5 complete UK tax years will be subject to the temporary non-resident (TNR) rules. These rules provide that certain categories of income and capital gains which arose in the period of non-residence are instead deemed to arise in the year of return to the UK. Where the TNR rules apply the income or gains are taxable when the individual returns to the UK.

How the statutory residence test works

The SRT is a step-by-step test applied every tax year (6 April to 5 April). It is broken down into three parts. These tests must be considered in the order set out below. While there are special rules for tax years in which the individual dies these are not considered in this post.

1. Automatic overseas tests

The first set of tests to consider are the automatic overseas tests. If you meet one of these, you're automatically not UK tax resident.

• First test: You were not UK resident in any of the three previous UK tax years and spent fewer than 46 days in the UK during the tax year in question.
• Second test: You were UK resident in any of the three previous UK tax years and spent fewer than 16 days in the UK in the tax year in question.
• Third test: You work full-time overseas, spend fewer than 91 days in the UK, and work in the UK on fewer than 31 days.

2. Automatic UK residence tests

The second set of tests to consider are the automatic UK tests. If you meet any one of these tests you will be automatically UK tax resident unless you also meet one of the automatic overseas tests.

• First test: You spend 183 days or more in the UK.
• Second test: Your only home is in the UK. Even if you also have a home overseas you will still satisfy this test if you do not visit your overseas home on at least 30 occasions throughout the tax year.
• Third test: You work full-time in the UK over a 12-month period and one day in the 12-month period falls in the relevant UK tax year.

3. Sufficient ties test

If you meet neither automatic test, you need to consider the sufficient ties test. The relevant ties are as follows:

• Family ties
• Accommodation tie
• Work tie
• 90-day tie
• Country tie (this tie is only relevant to leavers as explained below)

The number of days you can spend in the UK without being UK tax resident depends on: whether you are a "leaver" or an "arriver" and the number of UK ties you have. An "arriver" is someone who has not been UK resident in any of the previous three UK tax years. A "leaver" is someone who has been UK resident in one or more of the previous UK tax years.

What if you leave mid-year?

You might not need to break UK residence for the whole year. The SRT also includes split year rules. Where an individual falls within a split year "case" the tax year is split into an overseas part and a UK part. Certain categories of income and capital gains will not be taxable in the overseas part of a split year. The split year cases relevant to an individual leaving the UK are as follows:

• Case 1: Starting full-time work overseas.
• Case 2: Partner of someone starting full-time work overseas.
• Case 3: Ceasing to have a home in the UK.

The rules here are complex but in many cases you will only pay UK tax on income and gains which arise in the UK part of a split year.

Tools to help you plan

I have built a free Statutory Residence Calculator to help you get a rough sense of the number of days you can spend in the UK while remaining non-UK tax resident.