CheckLists.Tax (beta)
P2. Temporary non-resident returns
TEMPORARY NON-RESIDENCE
- Temporary non-resident: test
General
- If:
(1) T has a period of sole UK residence because during that period either:
- T is UK resident + not treaty non-resident; and/or
- T has a split year + is not treaty non-resident during the UK part.
(2) T subsequently (and immediately following the period of sole UK residence) has a period of non-sole UK residence because either T:
- becomes non-UK resident; and/or
- has a split year; and/or
- becomes treaty non-resident.
(4) In 4+ out of the 7 tax years prior to the tax year of departure (i.e. the tax year in which T begins the period of non-sole UK residence) either:
- T has a year of UK residence + is not treaty non-resident;
- T has a split year + was not treaty non-resident during the UK part;
(5) T subsequently becomes solely UK resident again (i.e. after the period of non-sole UK residence).
(6) The time between:
- the end of the period of sole UK residence (in (1)); and
- T beginning to have a sole UK residence again
Is 5 years or less.
- Then: T was temporarily non-resident (para 110).
4 out of 7 preceding tax years test
- Note that a year does not count towards the "4" if T was treaty non-resident in that year.
Counting the 5 years (5 complete tax years not sufficient)
- The period of non-sole UK residence must exceed 5 years to avoid being TNR.
- "For these special rules not to apply, the individual’s period of non-residence must exceed 5 years, that is, a minimum period of five years plus 1 day. For example, 4 May 2015 to 4 May 2020." (RFIG21510)
- 5 complete tax years of non-residence is not sufficient.
- It is based on 5 calendar years, not necessarily 5 tax years.
- Accordingly, if T has a split year when leaving the UK + a split year when returning to the UK, there may only be 4 complete tax years of non-residence for T to avoid being TNR.
- See example 2 at RFIG21550.
Legislation:
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HMRC manuals:
RFIG21510 - Statutory Residence Test (SRT): Temporary non-residence: Introduction;
Commentary:
See also:
- Short period of treaty non-residence can result in whole tax year being non-sole UK residence
- If there is any time in a tax year when the individual is treaty non-resident, that is not a period of sole UK residence (para 112).
- If it is a split year, there might be a period of sole UK residence during the UK part of that split year.
- This can mean that even a short period of treaty non-residence can exclude a whole tax year.
- See HMRC's example 1 in RFIG21550:
- Max moves to Poland in February 2015 + is treaty non-resident from February to April 2015.
- Despite Max being UK resident for the whole of 2014/15, the period of TNR begins after the end of 2013/14 due to the short period of treaty non-residence at the end of 2014/15 (which was not a split year).
- T will have to actually be resident in the other state + satisfy the tie-breaker test in favour of that other state.
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- Individual can be UK resident throughout + have a period of TNR (treaty non-resident)
- The test for TNR looks at whether T has a sole UK residence.
- Accordingly, if T is UK resident under SRT but is treaty resident in another country under a treaty, T can have a period of temporary non-residence.
- The effect would be to bring in to charge the TNR income and gains that arose during the period of treaty non-residence, when it ceases.
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- T becomes UK resident again but continues to be treaty non-resident (TNR period not finished)
- If:
(1) T becomes UK resident against under the SRT test after a period of non-residence;
(2) T continues to be treaty non-resident;
Then: The period of temporary non-residence has not ended (and may, yet, exceed 5 years).
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- Period of return
- Period of return is not used in the test for TNR.
- But is used to identify when TNR income and gains are charged.
- It is the first period of sole UK residence after the relevant period of non-sole UK residence (para 115).
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INCOME TAX
Distributions from UK companies whilst TNR
- Distributions to individual whilst TNR
Clawback of non-resident IT relief
- In the year of distribution, the non-resident is entitled to non-resident IT relief under ITA s.811, which effectively limits the tax to nil.
- In the year of return, if the distribution during the period of TNR was "relevant investment income", his income for the year of return is increased by an equivalent amount (s.812A).
- Relevant investment income:
- Dividends/distributions and stock dividends from UK companis.
- Distribution company must be a close company.
- "(c)the income arises or is treated as arising to the individual because the individual was at a relevant time—
(i) a material participator in that company, or
(ii) an associate of a material participator in the company"
- Relevant time
- Essentially means the year of departure or the prior 3 years (s.812A(11)).
- Query how this works given that the distribution in the TNR period arises to the individual because they hold the shares at that time, not because they held shares at an earlier time.
- Purposive construction to make the legislation work likely.
- Query what happens if the recipient of the dividend was not a shareholder at the relevant time but received the shares from, e.g. spouse.
Carve out for post-departure trade profits
- Exclusion only applies where dividend is in cash or stock dividend.
- Refers to trade profits arising in accounting period beginning after start of TNR + apportionment of profit for accounting period straddling start.
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- Deemed distributions by close companies
- Relevant investment income includes income treated as arising to the individual.
- This will include deemed distributions under CTA 2010, s.1064.
- The reference to distributions deemed to arise by virtue of being an associate of a material participator (in s.812A) covers the fact that s.1064 applies to associates of a participator (s.1069).
Legislation: CTA 2010, s.1064, s.1069;
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- Distributions to trustees of settlor-interest trust
Taxable in any event if UK resident beneficiary
- If the trustees are UK resident or there was a UK resident beneficiary in the year of distribution, the trustees will likely have been taxable at that time (non-resident IT relief is disapplied under ITA s.812).
Settlements legislation
- The UK source distribution is deemed to be income of the settlor under ITTOIA s.624 (s.648 only applies if the settlor would not be chargeable, which is not satisfied - s.368).
- In the year of distribution, the non-resident is entitled to non-resident IT relief under ITA s.811, which effectively limits the tax to nil.
- In the year of return, if the distribution during the period of TNR was "relevant investment income", his income for the year of return is increased by an equivalent amount.
- See above for meaning of relevant investment income.
- It is considered that deemed settlements legislation income is not relevant investment income because the income is not treated as arising because the individual is a participator, or an associate of a participator.
- Whilst the trustees are an associate of the settlor, the settlor is not an associate of the trustees (CTA 2010, s.448).
- Association is one way: "You should note that the rights and powers of the settlor and his or her relatives may not be attributed to the settlement trustees under (b) of CTM60150, that is, this association is one way only." (CTM60170).
- In any event, the income is not deemed to arise to the settlor because of being associated with the trustees, but because the trust is settlor interested.
- The reference to "treated as arising" is to cover CTA 2010, s.1064 - confirmed by the fact that there is no equivalent language in ITTOIA s.408A (for non-resident companies, which do not fall within s.1064).
Transfer of assets abroad
- Transferor charge only applies if transferor is UK resident (s.721(3A)).
- No provision that deems income to arise under s.720 if it would otherwise have arisen during TNR period.
- Accordingly, no income treated as arising that s.812A could potentially apply to.
- In any event, not relevant investment income - see above in relation to Settlements legislation.
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Distributions from non-UK companies during TNR period
- Distributions to individual whilst TNR
Dividend charge
- Non-resident individual not chargeable on dividends from non-resident company during period of TNR (ITTOIA s.368).
- Dividend is treated as received in year of return if (ITTOIA s.408A):
(1) T received or became entitled to dividend during TNR period.
(2) Company would have been close company if UK resident.
(3) T becomes entitled to or received dividend by virtue of being, at the relevant time:
- a material participator in the company; or
- an associate of a material participator.
(4) Individual not otherwise taxable on dividend, but would be if received in year of return
- Relevant time
- Essentially means the year of departure or the prior 3 years.
- See above on the difficulties this gives rise to (Distributions to individual whilst TNR).
Carve out for post-departure trade profits
- Refers to trade profits arising in accounting period beginning after start of TNR + apportionment of profit for accounting period straddling start.
Distribution charge
- Essentially identical - see ITTOIA s.689A.
- Save that there is no post-departure trade profits relief - that only applies to dividends from non-resident companies (similar to the position for UK companies, see above).
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- Distributions to trustees of settlor-interest trust
Settlements legislation
- If the settlor is non-resident in a tax year, income arising under the settlement does not include settlement income that would not have been chargeable on the settlor if they had actually been entitled to it (ITTOIA s.648(2)).
- Settlor would not be chargeable on distribution by non-UK company if actually entitled to it (ITTOIA s.368).
- Query whether the TNR rules can be relied on to say settlor would have been chargeable - but that seems circular.
- In any event, deemed settlement income should not fall within s.408A because:
-T does not actually receive or become entitled to dividend (and is arguably not deemed to - deemed to have income, hence why s.624 has free-standing charging provision).
- Income is not treated as arising because the individual is a participator, or an associate of a participator.
- Whilst the trustees are an associate of the settlor, the settlor is not an associate of the trustees (CTA 2010, s.448).
- Association is one way: "You should note that the rights and powers of the settlor and his or her relatives may not be attributed to the settlement trustees under (b) of CTM60150, that is, this association is one way only." (CTM60170).
- In any event, the income is not deemed to arise to the settlor because of being associated with the trustees, but because the trust is settlor interested.
Transfer of assets abroad
- Transferor charge only applies if transferor is UK resident (s.721(3A)).
- No provision that deems income to arise under s.720 if it would otherwise have arisen during TNR period.
Legislation: ITTOIA, s.648;
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Trust income distributions during TNR period
- No TNR rule for income distributions from trust (IIP holders not covered)
General position
- No TNR rule for tax on annual payments, which applies to income distributions from trusts.
- No charge even if paid in overseas part of split year XX.
Deemed relevant distributions
- FA 2026 will introduce rules deeming relevant distributions to arise to individuals in certain circumstances.
- Query whether they can apply where a trust receives a payment from a company and makes a payment to a beneficiary.
Transparent IIP holders
- If beneficiary has a transparent IIP, their source of income is the underlying source (e.g. the company paying the dividend to the trust), not the trust, so apply the TNR rule for that type of income.
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Loans to participators
- Deemed release of loan to participator upon return of temporarily non-resident individual
- Where loan etc. is released/written off while the debtor is temporarily non-resident, the release/writing off is treated as occurring upon return (ITTOIA s.420A).
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Legislation: ITTOIA s.420A;
Cases:
HMRC manuals: CTM61657;
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Pensions
- Withdrawals, lump sums, benefits
RFIG21580.
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Employment
- Lump sum payment under EFRBS whilst TNR
- Where the relevant step is the payment of a lump sum under an EFRBS whilst the individual is TNR, it is treated as taken in the period of return (ITEPA s.554ZA).
Legislation: ITEPA 2003, s.554ZA;
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Self-employment
- No specific TNR rule for self-employment income
General position
- There is no specific TNR for self-employment income.
- But the ordinary accruals basis of accounting for such profits will generally attribute income to the period in which it was earned.
- Cash basis available for some.
UK source income
- UK source self-employment income will be taxed in any event, subject to double tax treaties.
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Interest
- No specific TNR rule for interest
- There is no specific TNR rule for interest.
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Insurance policies
- Chargeable event gains on non-qualifying life policies made during prior period of residence
ITTOIA s.465B.
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Offshore income gains
- OIG arising from offshore funds acquired prior to period of non-residence
SI 2009/3001, r.23
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Remittance basis income
- Income remitted whilst TNR treated as remitted in period of return
ITTOIA s.832A.
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CAPITAL GAINS TAX
Personal gains
- Gains realised whilst TNR taxable upon return
General rule
- Gains realised during the period of TNR other than on post-departure assets are taxable upon return (TCGA s.1M(1), s.1N).
- Losses realised during the TNR other than on post-departure assets can be set against such gains.
- Even if the loss and gain arose in different tax years of the TNR period.
Post-departure assets
- Assets are excluded from the general rule if:
(1) Acquired by the individual during TNR period.
(2) Not acquired by means of a disqualifying no gain/no loss disposal.
- Spousal exemption (s.58), death of a life tenant (s.73), certain works of art (s.258(4))
(3) Consideration for acquisition was not reduced under certain provisions by reference to a UK resident disposal.
- The provisions are: 23(4)(b) or (5)(b), 152(1)(b), 153(1)(b), 162(3)(b) or 247(2)(b) or (3)(b)
(4) Asset is not an interested created by or arising under a settlement.
(5) Gain on the asset is treated as arising under certain provisions and is calculated by reference to another asset that was not a post-departure asset.
Legislation: TCGA 1992, s.1M, s.1N;
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Remittance basis gains
- Remittance basis gains remitted whilst TNR treated as remitted in period of return
- Remittance basis gains are treated as accruing to the individual when remitted to the UK (TCGA Sch 1, para 1).
- The TNR rule applies "in the case of the disposal of an asset by an individual who is [TNR]" (s.1M(3)).
- Most likely that this will be construed purposively to apply to gains on disposals whilst UK resident that are remitted when TNR.
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- Gains that arose and were remitted during the period of TNR: deemed remittance in period of return
- If:
(1) A gain accrued during a period of TNR.
(2) The gain was treated as accruing to the individual in the period of return.
(3) The remittance basis applied to the period of return.
(4) The gain was remitted during the period of TNR
Then: the gain is treated as having ben remitted in the period of return (TCGA s.1M(2)).
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Company gains that would have been attributed to the individual (s.3)
- Company gains/losses that would have been treated as accruing to a UK resident, treated as accruing in period of return
s.3E
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Trust gains that would have been attributed to the settlor (s.86)
- Trust gains realised during TNR period treated as accruing to the settlor in period of return
- If a gain would have been treated as accruing to an individual under s.86 if the individual had been UK resident, the gain is treated as accruing to the individual in the period of return (s.1M(3)).
- No exclusion for post-departure assets.
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Matching gains to benefits provided whilst non-resident
- Capital payments received whilst non-resident treated as received upon return
- General rule is that capital payments to non-residents are disregarded (s.87D(2)).
-Disregard does not apply if recipient is close member of settlor's family + settlor is UK resident (s.87D(3)).
- If a sum is received by a temporarily non-resident individual and disregarded per the above, the payment is treated as received in the beneficiary's period of return (s.87E).
- For the effects of this, see i9. Benefits provided by trust.
Legislation: TCGA 1992, s.87D, s.87E.
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- Capital payments received whilst UK resident but temporarily disregarded whilst non-resident treated as received in period of return if TNR
- As explained in i9. Benefits provided by trust, where a UK resident receives a capital payment/benefit and becomes non-resident before it is matched, the payment is disregarded during the period of non-residence.
- The same rule applies where the settlor was deemed to receive the payment and subsequently becomes non-resident.
- If the recipient/settlor turns out to only have been temporarily non-resident the temporarily disregarded payment is treated as being received in the period of return (s.87P).
- In contrast, if the recipient becomes resident again but was not temporarily non-resident (i.e. the period of non-residence exceeded 5 years), the payment is no longer disregarded, but not treated as received later (which would lead to priority matching to gains).
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- TNR individual retrospectively deemed to be UK resident for purpose of rules deeming receipt by company as receipt by participators
Temporarily non-resident participator
- A TNR participator is deemed to have been UK resident for the purposes of the rules which deem a capital payment received by a company to be received by its participators (whether the participator is UK resident can affect how much is apportioned to them).
- See i9. Benefits provided by trust.
- The effect is to retrospectively apportion all/part of the capital payment to the company to be apportioned to them (s.96(9A)).
- The capital payment can then be deemed to be received by that individual in their period of return (s.87E).
- This may alter the matching of gains to benefits in years prior to the individual's period of return - there are no time limits on making consequential claims and assessments to address that (s.96(9B)).
Legislation: TCGA s.96.
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