UK and US expats: Will lockdown affect your tax residency status?
What if Harry and Meghan were residents of Brazil?
Coronavirus travel restrictions have resulted in many individuals exceeding the maximum number of days to maintain their non-resident status in the UK and US. The question is whether these extra days will be considered as being in ‘exceptional circumstances’ for the purpose of determining tax residency.
Please note – we are providing guidance and opinions which should not be interpreted as formal tax advice. We recommend that you consult your accountant or contact us if you would like to be referred to a suitable accountant, based on your needs.
Depending on their circumstances and ties to the UK, non-residents can spend between 16 to 183 days in the country before they have to start paying tax. The rules are quite complex and depend on the residency history of the individual and a scale based on days and ties in the UK. At one end of the scale, you can be non-resident by spending 16-45 days a year and having three ties (e.g. accommodation, spouse/civil partner, work) and at the other end, by spending 121-180 days a year and having no ties.
There has been concern that some people who committed to managing their UK presence to avoid becoming tax-resident might have to unexpectedly spend extra days in the UK, incurring an unexpected tax bill. HMRC grants each non-resident an additional 60 days for exceptional circumstances; such as births, deaths, sudden and life-threatening illness or injury, which can be used throughout the tax year.
HMRC has announced that it will ‘look sympathetically’ at any case, agreeing to accept that the following circumstances are ‘exceptional’:
- the individual is quarantined or has been advised by a health professional to self-isolate in the UK;
- the individual has been officially advised by the government not to travel overseas;
- the individual cannot return to their country of residence due to the closure of international borders;
- the individual (expat) has been asked by their employer to return to the UK temporarily, as a result of the virus.
The 60-day annual limit was set out in the 2013 statutory residence test (SRT) and some advisors are seeking clarity on behalf of non-residents in case the lockdown and travel restrictions are extended. Air travel and border restrictions may still apply or be regarded as high-risk in June or July, especially for those in a vulnerable age group or health category.
Let’s take the example of Harry, a UK citizen and long-term resident of Rio de Janeiro and therefore a Brazilian tax-resident. Let’s assume he visited his family in Kensington during February and March (16-45 days, say 3 ties). In the final week of March, Brazil partially closed its land and air borders whilst some airlines reduced or halted their international schedules e.g. Norwegian Airlines suspended their London-Rio service on 21 March. With lockdowns and restrictions applying in April and May (so far), this could place Harry in UK tax-residency status in one or both tax years, either side of 5 April i.e. 2019/20 and 2020/21. One would not be amused.
The UK and Brazil have a tax reciprocity agreement in place – not a standard double-tax treaty – to prevent double taxation on income but this does not fully apply to other types of taxation e.g. capital gains and dividends. Given that Harry runs his own business in Copacabana, he receives dividends tax-free in Brazil – however, these dividends may now be subject to UK taxation.
Will HMRC allow for up to 90 or 120 days if lockdowns are extended or outbound flights to certain destinations from the UK are unavailable? In the above example, what if Brazil or the UK closed their borders due to a second wave of coronavirus infections? What if an expat decides to prolong their stay in the UK to care for a sick family member? British expats and non-residents stuck in the UK may be hit by significant and unexpected tax bills on income, capital gains and inheritance. Anyone who exceeded their maximum day count either side of the tax year, needs to keep track of the number of days affected by coronavirus. It is quite common for expats to utilise their day allowance towards the end of the tax year and this period happened to coincide with the growth phase of coronavirus and global lockdowns.
HMRC could start charging UK tax on such expats’ worldwide income, capital gains tax (sale of shares or property) and inheritance tax. We hope that HMRC will adopt a lenient and flexible approach, however there are no guarantees.
Meanwhile, the UK Finance Minister, Rishi Sunak, confirmed that the Statutory Residence Test (SRT) will be amended for any period(s) between 1 March and 1 June 2020 spent in the UK by individuals working on COVID-19 related activities. For people whose skillsets are currently required, these periods will not count towards the residence tests. More details here in the letter to the Treasury Select Committee.
Initially, US persons and foreigners, stranded in the US due to coronavirus travel restrictions, had no guidance regarding their tax treatment by the IRS. This was a cause for concern for many individuals given that US tax resident status brings with it the requirement of reporting of worldwide income and the risk of a US tax bill for otherwise non-US employer earnings.
- US tax residence exposes an individual’s worldwide income to US federal taxation and reporting;
- The number of days a foreign taxpayer is able to spend in the US during the next year might be impacted, even if they avoid being a US tax resident in 2020;
- US estate tax implications can also potentially arise, subjecting the individual to a 40% tax on the value of their worldwide estate at death.
Fortunately, in April, the Treasury Dept and IRS issued guidance which provides relief to individuals and businesses affected by lockdown who may otherwise be deemed resident aliens according to the ‘substantial presence test’. For many individuals, this means they have an additional 60 days which they can spend on US soil without being taxed on global income. However, as per the UK situation, it remains to be decided if the IRS will apply more flexibility in the event of an extended lockdown.
Let’s consider Meghan, a US citizen, living and working as an actress in São Paulo, filming her latest Netflix Special, “Ternos”, and therefore a Brazilian tax-resident. Given her US citizenship, Meghan will always be required to file tax returns in the US. Currently, Meghan pays Brazilian tax on on her salary, however, if she were stranded in the US due to travel restrictions, she would potentially be liable for US income tax on worldwide earnings, including her Brazilian salary. The 60-day extension removes this requirement. Aside from the potential taxation, we need to consider the headache and administrative cost of filing as both a US resident and a Brazil resident in the same calendar year and seeking to apply the US-Brazil reciprocity agreement to prevent double taxation.
For specific queries on expat taxation or financial planning, please contact us here.
Read our Coronavirus article about decision-making in times of uncertainty.
- Freestocks.org on Unsplash.com – for the cover photo
- Rawpixel.com – for their selection of photos and graphics, including a wide range of free Coronavirus design resources.