Service France

Stephan Weber of Sykes Anderson LLP solicitors and chartered tax advisers comment on the recent case of Gaines-Cooper v Revenue and Customs Commissioners which has recently received wide spread publicity in the UK press.

Tax residency can be a highly contentious issue particularly for high net worth individuals. While gains and income arising from land and some other types of property which is situated in the UK is in most cases taxed in the UK, property outside the UK is generally only taxed by the UK Revenue where the owner is resident in the UK. If you are both resident and domiciled in the UK you are taxed in the UK on income and gains worldwide on an arising basis.

A recent ruling by the UK Special Commissioners concerned the test for determining UK residency status. It has been widely reported in the press as it is claimed that the ruling is likely to change the applicable ‘law’ on this matter.

First of all, one has to stress that there is no actual ‘law’ that lays down a specific test for determining residency status for tax purposes, the UK Revenue has merely adopted a general practice. However, to argue that this practice is not really law is a moot point since the practice has been followed in almost every case. Changing the practice would mean in effect changing the ‘law’.

Currently, individuals who are in the UK for more than 183 days in any tax year or for 91 days on average per year over a four year period are deemed UK residents. In counting these days of presence in the UK days of arrival and departure are disregarded.

In the recent case of Gaines-Cooper v Revenue and Customs Commissioners the Special Commissioners ruled that a different method of counting had to be used in order to give a more accurate picture. Rather than ignoring days of arrival and departure, nights spent in the UK should be the deciding factor in determining the amount of time spent in the UK.

If this ruling were to be followed generally a number of individuals are likely to become deemed UK residents who were not so before. However, the ruling needs to be put into perspective:

• This decision can still be appealed and it is expected that this will be done. Therefore, the ruling is not final and not binding yet.

• In coming to their decision the Special Commissioners stressed several circumstances that were specific to the case in question: For example, the taxpayer was a British national, he retained property in the UK and during some of the relevant period his wife and child had been living in the UK. Furthermore, while he alleged to be resident in the Seychelles he actually spent more time in the UK than he did there. Accordingly, this decision might be limited to the particular circumstances of the case. That means that even when the decision becomes final it might not set a new general rule for determining UK residency status.

• Lastly and maybe most importantly, what appears to be widely overlooked is the fact that any general rule for determining UK residency status will be of little relevance if there is an international tax treaty in force between the countries involved. There are such tax treaties for example between the UK and France and the UK and Switzerland.

If an individual or a company fulfils the residency requirements set down by the countries in question (it is at this stage that any domestic UK rule for determining residency status has to be taken into account) so that he is resident in two countries and hence in the absence of a treaty might be liable to double taxation on his worldwide assets, any international tax treaty will apply. The treaty is also likely to apply if there is a potential tax liability in a treaty country even where there is no question of residency. Most tax treaties (including those between the UK and France and the UK and Switzerland) provide for how residency is to be determined between the two countries.

For example, if you spend six months of the year in France and 6 months in the UK (e.g. working or visiting family) and your wife and children live in France it is likely that you will be resident in France under French rules and will exceed the number of days required for residency in the UK. To determine residency, the first question asked by the treaty is where you have accommodation available. If you own a property in France and rent a flat in the UK and both properties are available for your use, the question will not be resolved. In such a case the deciding question is where your centre of vital interests is. This usually means where your family life is (a good test for this is where you feel that you ‘live’) so here you would be resident in France. You would be taxed as a French resident irrespective of precisely how many days you spend in the UK.

Accordingly, only in cases where there is no relevant international tax treaty providing for residency will a domestic rule for determining UK residency status be decisive.

In conclusion one can say that this ruling of the Special Commissioners is admittedly an interesting decision, however, the media “hype” surrounding it seems to be unfounded. It remains to be seen whether the ruling will actually change the test for determining UK residency status. Moreover, in times where the number of international tax treaties increases on a monthly basis any general rule on UK residency status will become less and less important. It is only of real relevance for those who are claiming residency in a non-treaty country or attempting to be ‘resident nowhere’.