The 130-page document also contains guidance on how the new residency test would be implemented.
As reported, the UK Government’s plans to establish a statutory residency test were first announced in April 2011. A consultation document was subsequently published in June 2011, seeking views from the industry and public on how the test might most fairly be devised. In December, the Treasury announced it was postpoining the publication of its draft legislation, effectively delaying the introduction of the new test by a year, to 2013.
Noteworthy to advisers in the just-published document, according to Prudential technical manager Gerry Brown, is a section which addresses how investments of those departing and subsequently returning to the UK are to be taxed. It suggests that a policyholder whose departure from the UK triggers a “chargeable event” when non-resident against his or her investment bond – such as a “large part or full” surrender of his portfolio – and who then returns to the UK, “will at that point be held liable for tax” on the investment’s gain, Brown said.
The rule is an anti-avoidance measure aimed at counteracting the risk of individuals creating artificial, short periods of non-residence, in order to receive income free of tax that accured during a period of UK residence, when it would otherwise have been liable to UK tax.
As written, it is similar to an existing rule that applies to capital gains, that treats gains arising in a temporary period of non-residence as accruing to the taxpayer in the year of his or her return, Brown noted.
“The Government confirms that the new rule will be modelled on the existing capital gains rules, and will apply where an individual has been resident in four or more of the seven tax years prior to the tax year in which they become non-resident and becomes resident again within five years of leaving”, Brown added.
“When all those conditions are met, certain types of income that arise during the years of non-residence will be treated as arising instead in the year in which the individual becomes resident again.”
Brown said this rule will affect distributions from close companies; lump sum benefits from employer-financed retirement benefit schemes, and chargeable event gains from life insurance contracts.
Brown said the consultation, as spelled out in this latest document, was generally to be welcomed, with the Government re-stating its commitment to providing "a fair way of determining residence status" while at the same time preventing "situations where individuals can become and remain non-resident despite retaining strong connections to the UK".
It also has acknowledged, he pointed out, that the current 10-day limit should be increased to 15 days.
"The Government has suggested some relatively minor alternations to the original proposals, in response to the comments received,[and]there are a few other changes, which will be the subject of further consultation, but these are at the margins," he added.