UK Autumn Budget Part 2: Balancing Tax and Immigration Residency

Many individuals are considering their visa options overseas in anticipation of the UK Autumn 2024 Budget. The first installment of this blog series explored the anticipated changes in the UK’s new governments first budget including the new tax residence-based test and what other global residency pathways individuals might be exploring as alternatives to the UK.             

A person may live in multiple countries, own property in various locations divide their time across different jurisdictions yet are only be considered a tax-resident in one or a select few of those countries. Usually, the country in which an individual is considered a tax resident is the country in which they reside pay taxes, subject to various reciprocal arrangements relating to double taxation. The United States is an outlier in requiring its non-resident citizens to file a US tax return and pay US income taxes on their worldwide income.

In the UK, the current tax position of an individual depends on both their residence and domicile status. However, the government has proposed to abolish the tax regime for non-domiciled individuals and to replace the remittance-based test with a new residence-based test. There has been widespread speculation that these proposals may need to be watered down over concerns that they will not generate enough tax revenue if many wealthy non-domiciled individuals leave the UK.

Therefore, advice on both the applicable tax rules and immigration rules should be considered in tandem before an individual with substantial foreign assets or income opts to relocate.

UK residence

At present, individuals who are tax-resident and domiciled in the UK are subject to Income Tax and Capital Gains Tax on their worldwide income and capital gains. However, if an individual is non-domiciled in the UK, they can choose to use the “remittance” basis of taxation and avoid paying tax on their overseas assets and income. The current non-domiciled regime is expected to be abolished from 6 April 2025.  

Whether an individual is taxed in the UK depends on several factors. including how many days they spend in the UK in any financial year. Furthermore, for tax purposes individuals could become automatic tax residents if they spent 183 days in the UK in the financial year. UK financial years run from 6 April to the following 5 April.

This is distinctly different from immigration residence, for which one year may run from the date the individual entered the UK or was granted Permission to Enter the UK, or the date they switched into a new UK immigration status. Years can be calculated either by reference to each calendar year since then, or on a rolling 12-month basis. 

This is an important difference, as many UK immigration routes consider an individual a UK resident if they spend less than 180 days outside the UK in any 12-month period over five continuous years when seeking permanent residence.

For those who wish to apply for naturalisation as a British citizen, the residence test requirements are also different. The applicant must now show that they were not absent from the UK for more than:

• • • 450 days in the five-year period before their application; and
    • 90 days in the 12-month period ending with the date of application

Alternative rules apply for applicants who are married to,or are in a qualifying civil partnership or an equivalent cohabiting relationship, with a British citizen at the time of their application.

Immigration status

While the proposed new tax residency-based test only allows for four years before an individual becomes resident in the UK for tax purposes, most UK immigration visa routes require five continuous years of residence before becoming eligible to apply for Indefinite Leave to Remain (ILR), i.e. Settlement in the UK. “Continuous residence” for immigration purposes means that during this five-year period, the individual must not have interrupted their residency by, for example, being absent from the UK for over 180 days in any rolling 12-month period.

This means that under the new tax regime, individuals could become tax residents in the UK for tax purposes one full year before they can apply for ILR and access the benefits of this status.

Most individuals who successfully apply for ILR in the UK need to wait an additional 12 months before they can apply for naturalisation (unless they are married to a British national).

This requirement is likely to make the UK a less attractive jurisdiction to relocate to or stay in for individuals with global assets and income. Those who relocate to the UK do so in order to settle in the UK or obtain citizenship. However, they may not be able to meet the five-year continuous residence requirement for ILR or the requirements for naturalisation set out above without incurring significant tax obligations.

Given the upcoming changes many individuals may be considering alternative jurisdictions which will allow them to benefit from more attractive tax regimes. This has led to speculation that the government may need to water down some of the proposed changes which are expected to be outlined in the Autumn 2024 Budget.

Other considerations

Residency is also considered differently to tax and immigration residency for social security (National Insurance) purposes. For example, across the European Union, social security provisions will apply a “habitual residence” test which will look at where an individual has the strongest personal ties. UK residents and nationals who relocate to other countries will need to consider whether their status in their host country allows them to benefit from social security provisions, or whether they will retain social security liability in their home country.

Conclusion

Tax, immigration, employment and social security regimes often lead to discrepancies in residence status and related rights in the UK and overseas.  Many individuals are seeking information about their residency options and where they can benefit from more attractive tax and residency provisions. For foreign nationals who do choose to relocate to the UK, it is more important than ever to seek professional advice to carefully assess and plan their relocation.

This blog was published on 28 October 2024, and due to the circumstances, there are frequent changes. To keep up to date with all the latest updates on global immigration, please subscribe to our alerts and follow us on LinkedIn, X, Facebook and Instagram.