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What is split-year treatment?
Technically, you are either resident or non-resident for the whole tax year. However, there are rules which may apply to you if you arrive in or leave the UK in the year. These 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 GOV.UK in section 5 of RDR3.
What is the effect of split-year treatment?
If the special rules apply, you pay UK income tax as a UK resident for income earned in the ‘UK part’ of the year and you pay income tax as a non-resident for income earned in the ‘overseas part’ of the year. Broadly, this means that the non-UK income earned in the overseas part of the year is out of scope of UK income tax.
For example, if you come to the UK on 1 July 2021 and you are eligible for split-year treatment from that date, your residence position for the purposes of calculating your income tax liability in 2021/22 will be as follows: you will be taxed as a non-resident for the period from 6 April 2021 to 30 June 2021 and you will be taxed as a UK resident for the period from 1 July 2021 to 5 April 2022.
As non-residents are not taxable on foreign income and gains, income you receive in your home country before 1 July 2021 will not be taxable in the UK. Therefore 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. You cannot choose the date on which you split the year; it is determined by law and depends on your circumstances. However, if the date on which you split the year under the SRT is not what you expect (for example, in a year of arrival the UK part of the year begins sooner than the date you move here with your family, because of time you have spent in the UK prior to their arrival) it may be possible to ‘override’ the split-year date for certain purposes by using a double tax agreement. This mechanism can also be used if you are ineligible for split-year treatment for some reason (see below). However, this is a complex area and you should seek advice if you feel this applies to you.
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 having a home in the UK only.
Similar rules apply to departure years.
You can find more detail on whether or not you meet the conditions for split-year treatment, including the order of priority in which the cases are applied, within the guidance on GOV.UK.
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-sourced income only.
If you are resident but ineligible for split-year treatment in an arrival or departure year, it is usually possible to make appropriate claims under double taxation agreements (if one exists between the UK and the country concerned) to limit or exclude the UK’s ability to tax your pre-arrival (or post-departure) income. In effect, this secures 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 2021 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 2021/22. As he did not leave New Zealand until August 2021, he is tax resident there for most of 2021 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 2021 to August 2021, 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 on our page What is dual residence?.
Is there split-year treatment for capital gains tax?
There are also rules which allow split year treatment in respect of the capital gains of people who come to the UK part way through a tax year. Where these apply, capital gains tax would only apply to gains arising in the UK part of a split year (unless the gain is in respect of UK land and property or the temporary non-residence rules apply – see our separate guidance).
You can find more details on whether or not you meet the conditions for split year treatment within the guidance on GOV.UK. You can also find more information on capital gains tax in respect of UK land and property for non-residents on GOV.UK.
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. These are anti-avoidance rules to prevent people from leaving the UK to dispose of an asset just to avoid capital gains tax.
For instance, if you went overseas on 1 July 2021 and you were eligible to split the year from this date, then a disposal on, say, 1 September 2021 would not be charged to UK capital gains tax in that year. However, if you return to the UK within five years (say in 2024/25), the disposal will be treated as arising in the year you return. Similarly, if you make a disposal during 2022/23 and return to the UK in 2024/25, the disposal will be taxed as a gain accruing in 2024/25.
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 not in scope of the regime.
Our separate guidance on capital gains tax for individuals not resident in the UK contains further detail.
The rules on split-year treatment 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 GOV.UK. We tell you how you can find a professional tax adviser in our Getting Help section.