Losing UK residence is an important consideration for UK expats living and working in Hong Kong. Retaining UK residence could mean that income tax and Capital Gains Tax (CGT) is payable in the UK on worldwide income and gains. UK residence is a complex area and there is currently no definition of residence in tax legislation. This is set to change from 6 April 2013 with the introduction of a new statutory residence test.
It is important to understand what is meant by 'resident in the UK' as this will determine what UK tax may be payable. It is not just about having a house or flat in the UK or about how much time is spent there, but the greater the connections someone has with the UK the more likely they are to be defined as UK resident.
Generally the more time spent in the UK the more likely you are to be UK resident. Spending more than half the tax year (183 days) in the UK will mean you are UK resident for that tax year. However, it is not as easy as simply staying away from the UK for a certain number of days.
Factors that may affect residence status include:
If UK visits become part of the regular pattern of life then it is likely that UK residence will apply. However, UK residence should not apply if visits are for a short-term, temporary purpose only - for example, returning to the UK for a holiday or for a short business project for an overseas employer.
UK residence rules are set for an overhaul from April 2013 with the introduction of a Statutory Residence Test (SRT). For UK expats living in Hong Kong this should provide a greater degree of certainty which is missing under the current rules.
The test looks at both the amount of time spent in the UK and the other connections with the UK and is in three parts:
Automatically overseas test – The first test is to determine whether someone is conclusively non- resident. There are separate day counting rules which will affect long-term Hong Kong residents and those who have recently left the UK. Separate rules also apply for those working full-time in Hong Kong.
Conclusive non-residence test
Full-time work abroad
|Previously UK resident (any of last three tax years)||Previously non-resident (all of last three tax years)|
No more than 90 days spent in the UK; and
Maximum of 25 UK working days (based on three hour working day), or
Maximum of 20 UK working days (based on five hour working day)
(if resident in last three tax years)
(if non-resident in all previous three tax years)
For those leaving the UK, the maximum days of UK presence which will be considered conclusively non-resident is to be extended from 10 to 15 days. This should allow expats to return to the UK for a two week period, perhaps as a holiday or to visit friends and family, without regaining their UK residence.
Automatically UK resident – A test of conclusive UK residence based on spending more than half the tax year in the UK, and location of home and full-time work:
Tie breaker – This test only applies where neither of the previous tests proves conclusive. It includes a mix of day counting rules with certain links that have been kept back in the UK.
The five connection factors are:
Tie breaker - UK connection factors
Previously UK resident (any of last three tax years)
Previously non resident (all of last three tax years)
Maximum number of days spent in the UK
|Always non resident||<16 days||< 46 days|
|Four connection factors||Up to 45 days||Up to 90 days|
|Three connection factors||Up to 90 days||Up to 120 days|
|Two connection factors||Up to 120 days||Up to 182 days|
|One connection factor||Up to 182 days||Up to 182 days|
|Always resident||183 days +||183 days +|
If someone leaves the UK to work full-time in Hong Kong they may be treated as non-UK resident from the day after departure. But they must have a contract of employment that covers a complete tax year. Also any visits to the UK must not average more than 90 days per tax year.
While in the UK any substantive work performed may affect an individual’s resident status. Current HMRC guidance indicates that no more than 10 days ‘substantive duties’ can be performed in the UK. There is no limit to the amount of ‘incidental duties’ which can be performed. The guidance indicates that training and certain reporting duties undertaken in the UK are considered as incidental duties.
Under the Statutory Residence Test, substantive and incidental duties are to be replaced with
a defined number of working hours and days regardless of the work carried out. Currently, there are two proposals under consideration:
James accepts a two year secondment to work on a project for the Hong Kong subsidiary of his UK employer. Laura, his long-term partner, will remain in their family home back in the UK.
Under the proposed SRT, James may become non-UK resident as a result of taking up full-time work abroad. A condition of this is that the Hong Kong contract spans a complete tax year.
James will need to consider how any visits he makes to the UK may affect his residency status. For those working full-time overseas there are two additional tests to be considered non- resident. A limit to the number of days spent in the UK and also the number of working days in the UK. James must ensure any visits to see Laura back in the UK do not exceed 90 days in total. But he will also need to watch carefully any work he undertakes while he is back in the UK.
Under the original conclusive non-resident test James may only undertake 20 days work in the UK. And just three hours work a day in the UK would constitute a working day.
However, the Government is considering relaxing the days of UK work following consultation. The two proposed alternatives are to increase the number of days to 25, or retain the limit at 20 days but extend the definition of a working day to five hours work.
Breaching the allowable working days in the UK will not automatically make James UK resident. If he is neither automatically overseas or automatically UK resident, the tie breaker will apply which would involve a mix of connection factors back in the UK and day counting rules.
But he will have at least three connection factors – family, accommodation and UK presence in previous years. If James’ working days in the UK exceeded 40 days he would trigger a fourth test - substantive work in the UK.
As James has been resident in the previous three tax years he will be limited to spending;
It is therefore important that UK expats are aware of the need to keep detailed records of visits back to the UK and any work undertaken. Modern technology means that work is no longer confined to the office or worplace. With that comes the difficulty of recording details of time spent making mobile phone calls or answering emails.
A summary is available from HM Treasury discussing the changes to these rules. You can find it at www.hm-treasury.gov.uk.
Any links to websites, other than those belonging to Standard Life (Asia) Limited (“SL”), are provided for general information purposes only. We accept no responsibility for the content of these websites, nor do we guarantee their availability.
Information provided in this briefing does not constitute any form of advice and SL is not responsible for any advice given on the basis of this briefing. Any reference to legislation and tax is based on SL 's understanding of law and tax practice in Hong Kong and the UK at September 2012. These will be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments nor is SL responsible for the completion of any tax returns on the basis of this briefing. We recommend that investors seek advice from professional advisers regarding their own personal circumstances.
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Disclaimer: The above information is for reference only and should not be construed as legal, tax or investment advice. You should seek professional advice regarding your tax circumstances and the types of savings and/ or investment that are suitable for you. Investing in investment-linked assurance scheme involves investment risks. Past performance is not indicative of future performance.