Last Updated on 30th January 2025
Tax residency is often assumed to be fairly straightforward – you live in one primary location and, therefore, might anticipate that your only tax obligations relate to taxes arising in that place.
In reality, tax law and residency can become highly complex, especially for expatriates who might own assets in varied countries, spend equal time in different homes, have interests, businesses or employment across borders, or have close familial ties in more than one location.
Understanding the ‘tests’ used to determine your tax residency can be essential to ensuring you remain fully compliant with all relevant tax regimes, file the appropriate tax returns and declarations, take advantage of tax efficiencies, and budget with confidence that your forecast tax liabilities are accurate.
Here, we’ll discuss the process of establishing tax residency and why this can differ from your visa-related residency position. We will also explore the tiebreaker tax rules where there is uncertainty and highlight some of the circumstances where we recommend consulting a tax professional.
Tax Residency: What It Means and Why It Matters
Knowing your tax residency status is a fundamental aspect of managing your tax affairs. It is commonly incorrect to make any assumptions without seeking independent advice from chartered tax advisers with the appropriate knowledge and expertise to assist expatriates in their tax planning.
That is because it is very possible to hold residency, permanent residency, or even full citizenship in multiple locations.
For example, you might be a British citizen living a proportion of the year in another country. But, without considering the assessment process for tax residency, you may not realise that all of your worldwide income is taxable in one place or the other – or that you are liable for taxes on the same assets or incomes in both.
Put simply, your tax residency shows where you are taxed based on your main home, the place where your primary income arises, or where you spend most of the time, but as we’ve intimated, this can be far from straightforward.
Getting your tax residency wrong could mean failing to file mandatory returns, falling foul of tax legislation, missing payments or liabilities, or paying duplicate taxes, which can usually be avoided by applying double tax treaties correctly.
Tests to Determine Your Tax Residency Status as an Expatriate
Tax residency can be complicated because it relies on a series of considerations, some of which instantly determine the place you are a tax resident and some of which rely on a degree of subjectiveness. These include:
- The number of days per year you spend in each country.
- Where you work or where your main income originates.
- Whether you own a permanent or primary home in either location.
- The location where you have family ties, such as a spouse, partner, or dependent children.
In the UK, the process is called the Statutory Residence Test. Typically, HMRC considers you a UK tax resident if you spend 183 days or more a year living in the UK. Other aspects of the test also consider whether you were a tax resident in any of the last three years and how many days a year you spend working within the UK.
The test works in descending order. If you don’t meet an ‘automatic test’ that establishes your tax residency, the tax office will conduct sufficient ties testing, combining all of the elements we’ve mentioned to decide whether or not you are considered a tax resident.
Tiebreaker Tests Where Your Place of Tax Residency Is Unclear
Tiebreakers, as the name suggests, apply when all of the previous tests have failed to identify a location of tax residency, usually because your income, assets and accommodation are split equally between two places.
In many cases, double tax treaties come into play. These exist where two countries have an agreement that helps the tax authorities determine how an individual with unclear tax residency should be taxed or in which location specific aspects of their income, wealth, or business activities will be subject to taxation.
These tests look at an individual’s tax affairs and circumstances, such as whether they have a permanent home in one country and not the other or attempt to clarify where their ‘vital interests’ are located.
While tax residency tests operate against a framework, it remains important to apply each assessment criteria with care.
Reliance on guesswork about whether you satisfy any of the tests or have enough evidence to support your assumptions can be high risk – and carry significant costs even if you had thought your financial affairs were being handled with full tax compliance.
When a Tax Professional’s Assistance May Be Key to Clarifying Your Tax Residency Position
Importantly, your tax residency status can change from year to year, particularly if you spend variable amounts of time in two places.
Any of the following changes to your personal circumstances may mean you need to revisit your tax residency position to ensure you are paying the correct taxes in the right jurisdictions and make tax-efficient decisions:
- Spending more or less time in one country than in the previous year.
- Changing your home or selling property assets.
- Switching jobs or business ownership.
- Family relocations, where your immediate family moves to a different country.
- Your relationship status changes, such as a marriage, separation or divorce.
- You have children who were not present or included in previous tax residency assessments.
For many expatriates, record-keeping is key. They keep track of the number of days they spend in each country, which can become very relevant when logging the duration of each stay and having evidence when tax residency assessments become complicated.
Otherwise, we strongly recommend consulting an expatriate tax specialist who is well-versed in the statutory testing process in the UK, the applications of double tax treaties, and untangling complexities to provide clear direction, assisting with tax residency evaluations and ensuring there is sufficient documentation to support their findings.
If you would like more information about the importance of tax residency, how double tax treaties may apply to your income or wealth, or to speak with one of our experienced accountants, wealth managers, or tax advisers, you are welcome to contact your nearest Chase Buchanan team at your convenience.
*Information correct as at January 2025