What is split year treatment?
Normally, if you are resident in the UK for any part of a tax year you will be taxed as a UK resident for the whole of the tax year. However, there are special rules which may apply to you if you arrive in or leave the UK in the year. These special rules split the tax year into a UK part, when you are taxed as a UK resident, and an overseas part, when you are taxed as a non-UK resident.
These special rules are contained in law, under the Statutory Residence Test (SRT). The detailed guidance can be found on the GOV.UK website in section 5 of RDR3.
What is the effect of split year treatment?
If the special rules apply, the UK income tax you pay because you are resident in the UK is calculated on the basis of the period you are treated as resident here (the ‘UK part’) rather than the whole of that tax year. This has the effect of splitting the tax year into resident and non-resident periods for the purposes of calculating the tax due.
For example, if you are eligible for split year treatment and you come to the UK on 1 July 2018, your residence position for the purposes of calculating your income tax liability in 2018/19 will be as follows. You will be treated as not resident for the period from 6 April 2018 to 30 June 2018 and you will be treated as a UK resident for the period from 1 July 2018 to 5 April 2019.
As non-residents are not taxable on foreign income and gains, income you receive in your home country before 1 July 2018 will not be taxable in the UK. So split year treatment can be quite useful in helping to prevent double taxation.
Split year treatment can be complex and the year may not be split on the date you expect, particularly if you spend time in the UK before your arrival or after your departure.
Who can have split year treatment?
You are only eligible for split year treatment for a tax year if you are UK resident under the SRT for that tax year and you arrive (or depart) from the UK in that year. You can only split a particular tax year once.
There are five broad sets of circumstances in which split year treatment may apply to you in the year that you arrive. In each of the following cases, there are other conditions that you must meet:
- you start to work full-time in the UK;
- you start to have a home in the UK only;
- you cease full-time work overseas and return to the UK;
- you are the partner of someone who stops full-time work overseas and returns to the UK;
- you start to have a home in the UK – this is different from the second bullet point above, because that covers the situation of only having a home in the UK.
Similar rules apply to departure years.
What if I cannot split the year?
If you are considered non-resident, then it does not matter if you are not able to split the year as you are subject to UK tax on UK source income only.
If you are resident, it is usually possible to make appropriate claims under double taxation agreements to limit or exclude the UK’s ability to tax your pre-arrival (or post-departure) income anyway – in effect, securing the same result as split year treatment, but just in a more roundabout way.
For example, Florian comes to the UK from New Zealand in August 2018 on a working holiday. He stays in hostels as he is travelling around and picks up work casually where he can. Under these circumstances he probably cannot split the year, so Florian will be tax resident in the UK for the whole of 2018/19. As he did not leave New Zealand until August 2018, he is tax resident there for most of 2018 too. This means that his pre-arrival employment earnings from New Zealand could be taxable in both countries. However the UK/New Zealand double tax treaty tells us that in the period April 2018 to August 2018, his New Zealand residence is ‘stronger’ – meaning broadly that the UK will give up its right to tax his New Zealand income in that period.
You can find more information in our section ‘what is dual residence?’.
Is there split year treatment for capital gains tax?
There are also special rules, which allow split year treatment for the capital gains of people who come to the UK part way through a tax year. Capital gains tax would normally only apply to gains arising in the UK part of a split year (unless the gain is in respect of UK residential property, which from 6 April 2015 have been taxable on non-residents).
You can find more details on whether or not you meet the conditions for split year treatment within the guidance on the GOV.UK website. You can find more information on capital gains tax in respect of UK residential property for non-residents on the GOV.UK website.
When leaving the UK, things may be more complex, as although you may be able to split the tax year for capital gains tax purposes, if you become non-resident for a period of five years or less and then become resident in the UK again, there are special rules that might seek to collect tax on any capital gains you had while you were abroad, in the year that you return. For instance, if you went overseas on 1 July 2018 and you were eligible to split the year from this date, then a disposal on, say, 1 September 2018 would not be charged to UK capital gains tax in that year. However, if you return to the UK within five years (say in 2021/22), the disposal will be treated as arising in the year you return. Similarly, if you make a disposal during 2019/20 and return to the UK in 2021/22, the disposal will be taxed as a gain accruing in 2021/22.
In general, these rules will only apply where you have been resident in the UK for four of the previous seven years prior to departure.
These rules also only apply to gains on assets owned before you left the UK. Gains on assets both acquired and sold in the years between the tax year of departure and the tax year of return are exempt.
The rules on split year and capital gains are very complex. You should take further advice from a professional tax adviser or HMRC’s Residency unit if you are considering selling an asset. You can find out how to contact HMRC Residency unit on the GOV.UK website. You can find an adviser on the Chartered Institute of Taxation website.