Briefing Note: UK Tax Residency and Inheritance Tax Status of Mr & Mrs X

UK Tax Residency and Inheritance Tax.pdf

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1. Overview of Facts

·     British passport holders.

·     Left the UK in 2002, currently reside in Grenada.

·     Pensionable age; draw UK State Pension (no credits).

·     Have Grenadian assets.

·     No UK property, but maintain a UK address (banking purposes).

·     Likely registered on the UK electoral roll.

·     Visit UK regularly for NHS access (medical assistance).

·     No formal notification to HMRC of non-residency.

·     Visits to UK sometimes exceed 183 days; stay with children in the UK.

·     No employment in the UK.

2. Income Tax Residency – Statutory Residence Test (SRT)

The Statutory Residence Test (FA 2013, Sch 45) determines UK tax residency. There are three limbs to consider:

A. Automatic Overseas Test (Paras 11–16, Sch 45 FA 2013)

An individual is automatically non-resident if they:

·     Were non-resident in the UK in all of the previous 3 tax years, and

·     Are present in the UK for fewer than 46 days in the current tax year.

This test is not met by Mr & Mrs X if they spend over 183 days in the UK in a year, or possibly even 91–182 days depending on ties.

B. Automatic UK Residence Test (Para 7–10, Sch 45 FA 2013)

They may be automatically UK resident if:

·     Present in the UK for 183 days or more, OR

·     Their only home is in the UK for more than 90 days and they spend more than 30 days there.

If Mr & Mrs X stay with children and visit for long periods, the 183-day rule may apply, making them UK-resident for tax purposes in those years.

C. Sufficient Ties Test (Paras 18–39, Sch 45 FA 2013)

If neither automatic test is conclusive, we assess ties and days of presence.

Relevant ties (likely applicable):

·     Family tie – staying with children = YES.

·     Accommodation tie – using UK family home = YES.

·     90-day tie – spent >90 days in either of the past 2 years = POSSIBLE.

·     UK work tie – NO.

·     Country tie – may apply if they spend more time in UK than any other country.

Conclusion on Residency:

·     If visiting UK for 183+ days, automatically UK resident.

·     If visiting for 91–182 days, they may still be UK resident depending on ties.

·     HMRC could treat them as UK resident for income tax unless clear evidence is shown of being non-resident under the SRT.

Caution: Their failure to notify HMRC, maintain a UK address, receive NHS care, and potentially appear on the electoral roll supports a UK connection – problematic under the SRT.

3. UK Income Tax Exposure

Under ITA 2007:

·     UK tax residents: taxable on worldwide income.

·     Non-residents: taxable only on UK-source income (e.g., UK pensions).

Mr & Mrs X receive UK State Pension, which is always UK-taxable, even if non-resident (ITA 2007, s18).

HMRC Note RDR1, Chapter 5 confirms that the UK State Pension is taxable in the UK even for non-residents, unless relief is available under a Double Tax Agreement (DTA).

Grenada has a full DTA with the UK.

Therefore:

·     If non-resident: taxed only on UK pension.

·     If UK-resident in any tax year: liable to UK tax on all worldwide income, including Grenadian investments or foreign pensions.

4. Inheritance Tax (IHT) Status

A. Current Rules – Domicile-Based (Until 5 April 2025)

Under IHTA 1984:

·     IHT is based on domicile, not residency.

·     Mr & Mrs X are UK domiciled by choice/origin (s267 IHTA 1984).

·     Despite long-term residence abroad, they have not acquired a non-UK domicile of choice unless they severed UK ties significantly.

A person retains UK domicile unless they permanently intend to live elsewhere and sever most UK connections. Given their UK ties, HMRC may argue they retain UK domicile.

Thus:

·     Their worldwide estate is liable to UK IHT, unless they’ve acquired a foreign domicile of choice AND ceased UK residence for at least 3 consecutive years (formerly 17/20 year rule pre-2017; now replaced with the “deemed domicile” rule – 15/20 years).

B. From 6 April 2025 – Move to Residence-Based IHT

As per the Spring Budget 2024 proposals:

·     UK IHT will become residence-based, not domicile-based.

·     An individual will be within the IHT net if:

o   UK resident for 10 out of the past 12 years, or

o   UK resident in any of the past 3 years before death or gift.

There may also be an exit charge (if resident for 10+ years and leaves UK, continues for up to 10 years after departure – details pending).

If Mr & Mrs X spend significant time in the UK, they may be deemed UK-resident under the IHT residence test, even if living abroad the rest of the year.

5. Worked Examples

Example 1 – UK Visits Under 90 Days Per Year

·     Mr & Mrs X spend less than 90 days in the UK per tax year.

·     They stay with children, but don’t exceed SRT thresholds.

·     Not deemed UK-resident under the SRT.

·     They live in Grenada full-time and have cut major UK ties.

Tax Position:

·     Income Tax: Non-resident. Only UK State Pension taxable.

·     IHT (Before 6 Apr 2025): UK domiciled by origin – worldwide estate liable unless domicile of choice acquired.

·     IHT (After 6 Apr 2025): If not UK-resident in last 10/12 years and not in UK 3 years before death/gift, then outside IHT scope.

Example 2 – UK Visits Exceeding 183 Days (2024/25 Tax Year)

·     Mr & Mrs X spend 190 days in the UK, staying with children.

·     Do not work; no main home in UK, but accommodation ties exist.

·     They become UK tax residents under automatic UK test (183+ days).

Tax Position:

·     Income Tax: UK resident – liable to UK tax on worldwide income including Grenadian income.

·     IHT (Before 6 Apr 2025): Still UK-domiciled – worldwide estate exposed.

·     IHT (After 6 Apr 2025): UK-resident 2024/25, so within 3-year window for death/gift in 2025/26–2027/28. IHT liability applies.

6. Recommendations

1.   Statutory Residence Test analysis should be done annually to determine residency position for tax.

2.   Professional domicile review is recommended to assess whether they have acquired a non-UK domicile of choice.

3.   Consider formal notification to HMRC of non-residence using Form P85 or a tax return.

4.   Keep clear records of UK visits and purposes.

5.   Re-evaluate estate planning in light of the residence-based IHT reforms in 2025.

Sources:

·     Statutory Residence Test: Finance Act 2013, Sch 45.

·     Income Taxation: Income Tax Act 2007, s18.

·     Inheritance Tax: Inheritance Tax Act 1984, s267, s267ZA (deemed domicile).

·     OECD Commentary & Spring Budget 2024 (on residence-based IHT).

·     HMRC Guidance: RDR1, HS304, P85.

OK now – let’s take a preventative, legally robust approach to help Mr & Mrs X avoid being caught in the UK residence trap, particularly in the context of:

·     The Statutory Residence Test (SRT),

·     The switch to residence-based IHT from 6 April 2025, and

·     Their ongoing UK connections, especially health and banking.

✅ Checklist: Steps to Avoid UK Tax Residence

1. Limit Days Spent in the UK Each Tax Year

🔹 Stay below 91 days (ideally under 46) in any UK tax year (6 April to 5 April).

·     Under the SRT (FA 2013, Sch 45):

o   < 46 days = automatically non-resident (if not UK-resident in past 3 years).

o   46–90 days = OK if minimal UK ties.

o   90 days = high risk if any UK ties.

📌 Tip: Count midnight presences – a day is counted if they’re in the UK at midnight (except in transit).

2. Cut or Sever UK Ties That Trigger the SRT "Ties Test"

The more ties you have, the fewer days you’re allowed before becoming resident. Mr & Mrs X likely have:

·     ✅ Family tie: Staying with children in the UK. Hard to avoid but manageable.

·     ⚠️ Accommodation tie: If they can access a place to stay regularly, this applies.

🛠 Mitigation:

·     Do not own or lease UK property.

·     Ensure children’s homes are not available to them continuously for 91+ days and they do not stay for more than 15 days/year in the same property (per Sch 45, para 30).

·     ⚠️ 90-day tie: If they spend 90+ days in the UK in one of the last 2 tax years.

🛠 Mitigation: Keep UK visits under 90 days consistently.

·     ⚠️ Country tie (if previously UK-resident and spend more days in UK than any other single country).

🛠 Mitigation: Spend more days in Grenada than UK.

3. Avoid NHS and Electoral Register ‘Hooks’

Even if not decisive in the SRT, these show continuing UK connection and may support HMRC challenging non-residence.

·     ❌ Electoral Register: De-register if not voting.

·     ❌ NHS: Accessing NHS care frequently may suggest residence.

🛠 Mitigation:

·     Use private healthcare in the UK or travel insurance.

·     Consider de-registering from NHS unless eligible due to reciprocal agreements (none with Grenada).

4. Review and Update UK Address Usage

They maintain a UK address for banking – this is risky.

·     Banks do not require a UK residential address – many accept non-resident clients if notified.

🛠 Mitigation:

·     Notify banks of non-residence status and use a c/o family address only for correspondence.

·     Remove themselves from being listed as residing at the UK address.

5. Formally Notify HMRC of Non-Residence

They’ve never told HMRC they left the UK in 2002.

🛠 Mitigation:

·     Submit Form P85 to confirm departure from UK.

·     File Self Assessment tax returns if requested by HMRC, stating non-residence under SRT.

·     Keep clear records of days in UK each year.

6. Domicile & IHT Mitigation (before April 2025)

Current IHT rules depend on domicile, which they likely still have in the UK.

🛠 Steps:

·     Consider formally acquiring a Grenadian domicile of choice:

o   Must intend to remain indefinitely.

o   Show severance from the UK (e.g. healthcare, address, voting, property).

o   Evidence with Grenadian wills, residency certificates, and advice from a local lawyer.

7. Post-April 2025 – Avoiding IHT Residence Traps

From 6 April 2025, IHT will be residence-based.

🛠 To avoid IHT exposure:

·     Ensure not UK-resident for 10 of the last 12 years.

·     Ensure not UK-resident in 3 years prior to death/gift.

·     Avoid becoming UK-resident in any single tax year from now onwards.

If they are UK-resident in 2024/25, then even if they leave, they could be within the 3-year IHT tail.

8. Document Everything

🗂 Maintain:

·     A "residence file":

o   Passport stamps, boarding passes, flight itineraries.

o   Hotel bookings or proof of stay abroad.

o   Copies of Form P85 and HMRC correspondence.

·     A diary/log of days spent in the UK (required for SRT substantiation).

🚨 Summary: What They Should Do Now

Step	Action
1	Limit UK days to under 91 (ideally under 46)
2	Avoid family and accommodation ties where possible
3	Deregister from NHS and electoral roll
4	Notify HMRC via Form P85
5	Notify banks of non-resident status
6	Take local Grenadian advice on acquiring a domicile of choice
7	Avoid UK residence from now to avoid new IHT rules (10/12 years)
8	Keep a detailed day-count diary

📌 Disclaimer – Important Notice

This article is published by LEXeFISCAL LLP for general information purposes only. The content does not constitute legal, tax, or financial advice and should not be relied upon as such. While every effort has been made to ensure the accuracy of the information at the time of publication, tax laws and regulations change frequently and may affect individuals differently depending on their particular circumstances.

Readers are strongly advised to seek specific professional advice before taking or refraining from any action based on this publication. No liability is accepted for any loss or damage, however arising, that may result from accessing or relying on this article.

Any references to UK tax legislation, case law, HMRC guidance, or international treaties are based on sources believed to be reliable, but no warranty is given as to their accuracy or completeness.

This publication remains the copyright of LEXeFISCAL LLP and must not be reproduced, distributed, or adapted without prior written permission.

Prepared by

Dr Clifford J Frank

Partner: LEXeFISCAL LLP

clifford.frank@lexefiscal.com

Tel: 0208 092 2111.

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