Tax residence has always been a complex and problematic area for some and the recent COVID-19 restrictions on movement between countries has further complicated matters for individuals and therefore also for trustees of offshore structures.  This article looks at the impact on individuals of the recent HMRC guidance in this area and in particular looks to key areas for trustees to be aware of to ensure that UK tax liabilities are not overlooked in these uncertain times.

HMRC has published guidance on when an individual’s presence in the UK by reason of the COVID-19 pandemic will be considered to be the result of ‘exceptional circumstances’.  Examples of 'exceptional circumstances' have always depended on the facts and circumstances of each individual case, but broadly have included national or local emergencies, such as war, civil unrest or natural disasters, and a sudden or life-threatening illness or injury.  They now however also include circumstances arising as a result of the pandemic, such as where you are quarantined or advised by a health professional or public health guidance to self-isolate in the UK, find yourself advised by official government advice not to travel from the UK, or are unable to leave the UK as a result of the closure of international borders.

In addition, the Organisation for Economic Co-operation and Development (OECD) has published guidance which covers how certain issues dealt with under the model OECD tax treaty will be affected by COVID-19, including how those who qualify as tax resident in more than one jurisdiction would be taxed under the model treaty.  The findings are broadly that any disruption to residence patterns as a result of the virus are unlikely to change where an individual is taxed, but this should be reviewed on a case by case basis.

Those of you who have been carefully monitoring the number of days (or midnights) that you and/or your clients spend in the UK will no doubt welcome the guidance provided by both HMRC and the OECD in this area.  However, there are still a number of matters to consider where this broadening of the definition of exceptional circumstances is not particularly helpful.

1. There is still a 60-day annual limit on exceptional circumstances – this may be reviewed over time, but at present it still stands.

2. The exact date from which the new guidance in relation to exceptional circumstance can apply is not clear.

3. The exceptional circumstances rule only applies to some of the tests contained within the UK Statutory Residence Test (SRT).  Exceptional circumstances are not, therefore, taken into account in other parts of the SRT, which means there may still be a danger of inadvertently becoming UK resident due to being unintentionally quarantined in the UK including:

• working full-time overseas under the third automatic overseas test – this test requires the individual to work a sufficient number of hours overseas without any significant breaks during the tax year.  In addition, it requires the number of days in the tax year in which an individual works for more than 3 hours in the UK to be less than 31.  However, these calculations do not take into account days spent in the UK due to exceptional circumstances.  This could result in the automatic full-time work overseas test condition not being met and the individual’s residence status then being determined by other SRT tests; and
• the family tie, the accommodation tie, work tie and country ties all count days, even when they are considered exceptional.

Trustees should be aware that when it comes to their tax liabilities and the liabilities of the settlor and any beneficiaries, tax residence can play a significant part in determining when these tax liabilities may arise and due to the complex nature of trust taxation, these may be easily overlooked.

Individual trustees who find themselves inadvertently spending more time in the UK due to COVID-19 could find that their personal residence position impacts the residence status of the trust(s) for which they are a trustee.

The residence position of a corporate trustee follows the general rules for company residence when determining the residence of a trust.  Directors of corporate trustees should therefore consider whether their personal residence status would impact the resident status of the corporate trustee and therefore the residence position of the relevant trust.

Settlors and Beneficiaries

UK resident settlors could find themselves subject to income tax and/or capital gains tax on income and capital gains arising within the trust and any underlying companies on an arising basis.

UK resident beneficiaries could find themselves liable to income tax and/or capital gains tax on trust distributions where they receive trust distributions in the tax year in which they inadvertently become UK resident.  They could also be liable to tax on distributions or benefits provided in earlier tax years that were not matched to income and capital gains of the trust because none existed, but then income and/or capital gains subsequently arose in the tax year of accidental residence.  

It is also important to consider the “temporary non-UK residence rule” for both settlors and beneficiaries of a trust, which could result in any income and/or capital gains realised in the period of non-UK residence as accruing in the tax year of the individual’s return to the UK where that individual has only been non-UK resident for a limited period of time.

Income Tax

Generally, a non-UK resident trust will only be liable to income tax on any UK source income and where that income solely comprises UK savings income, such as dividend income or bank interest, that liability may be restricted to the tax deducted at source on that savings income. This is only the case, however, where all the beneficiaries of the trust are non-UK resident.  Therefore, if the beneficiaries of the trust include a UK resident individual, then the trustees could be subject to income tax at a maximum rate of 45% on that income.

Inheritance Tax

New deemed domicile rules were introduced on 6 April 2017 which apply to individuals born in the UK with a UK domicile of origin who leave the UK but later return (also known as formerly UK domiciled and currently UK resident persons or FDRs).  These rules treat FDRs as automatically UK domiciled for the tax years in which they are UK resident (subject to a one-year grace period).  The impact of this on an offshore trust is that it can make a trust, which was previously IHT efficient due to being settled by a non-domiciled settlor, subject to IHT on all of its assets on ten-year anniversaries or when trust property is distributed to beneficiaries of the trust.

Reporting deadlines

There has been no relaxation of the rules surrounding the deadlines for reporting and paying IHT on chargeable events for trustees, and therefore it is just as important now as previously to ensure that the returns are completed and filed and IHT paid in a timely manner to avoid interest and penalties from accruing. 

It should also not be forgotten that outstanding overlooked liabilities can now be subject to much higher penalties under the Failure to Correct regime (in some cases up to 200% of the tax lost) and as such, not reviewing the status of a trust or the residence position of all interested parties could be a costly mistake.

HMRC enquiries and investigations

Whilst HMRC have offered taxpayers the option to put a temporary hold on ongoing enquiries and investigations, effectively allowing a “break” from proceedings, it is still important for trustees to ensure that momentum is not lost and that information is still being gathered in a timely fashion with the view to pick things up again as soon as the situation normalises.

In summary, although the additional guidance provided by HMRC and the OECD in relation to tax residence is without doubt useful and appreciated, individuals (including offshore trustees) should continue to carefully consider their plans and gather supporting evidence of their residence position.  This will ensure that they are clear on their tax residence position and not putting themselves or any trusts unintentionally within the charge to UK tax.