Importance of Residence for Tax Planning

Summary: A recent case brought by HM Revenue and Customs shows why residency is so important when tax planning for expats

Most expatriates are very well aware that when it comes to paying most forms of tax their liability comes down to establishing which country they are resident in, and that while there are clearly defined rules relating to the fact that you become resident in a country for taxation purposes after spending 183 days in it…there is a lot of confusion surrounding the issue for those who consistently skim the tax authority’s guidelines by a few days.

In a case that was recently brought before The Special Commissioner in the UK by HM Revenue and Customs, a man who was an airline pilot who maintained he had residency in Cyprus but who consistently spent time in the UK was eventually deemed UK resident for taxation purposes despite the fact that he apparently met the guidelines laid down by HMRC.  Therefore, the importance of ‘residence’ in tax planning cannot be emphasized enough…

The HM Revenue and Customs website clearly lays down the guidelines for those wishing to learn all about establishing residency, changing domicile and the differences between ‘residence’ and ‘ordinary residence’ – but there is one incredibly important fact to note before getting into the intricacies of the Revenue’s rules and regulations: -

There is no legally enforceable single definition of ‘residence’ when it comes to tax planning! 

I.e., things like discretion, common sense, judgment and prudence come into it – which is why the above mentioned airline pilot fell foul of the Revenue despite apparently adhering to their guidelines.

If HMRC can prove that an individual is flaunting their guidelines, skimming them by a few days here and there and profiting as a result they will come down on them heavily.  The airline pilot who had established permanent residency in Cyprus and who should only have been liable to pay up to 5% income tax on his salary there spent just under his allotted number of days in the UK in a house that he owned.  While in Cyprus he lived in a series of rented properties and so the Revenue was able to use the fact that he owned real estate in the UK to state that he clearly still wanted to remain strongly affiliated with Britain – and as a result he should pay up to 40% income tax for the privilege!

So, in a nutshell expatriates have to be extremely careful…if they want to establish residency elsewhere they should think about disposing of UK based assets and closing down major ties with the UK.  Furthermore they should be extremely careful about the number of days they spend in the UK compared to the number of days they spend in their new country of residence.  Those who consistently skim the guidelines laid down by the tax man and profit substantially from doing so should expect to receive a phone call from said tax man some day very soon!

To read about the specific rules and guidelines relating to residency and domicile we have produced a two part series called Tax Planning and Understanding Your Status.

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