Part 3.Split year treatment
Introduction
86.Paragraph 39 gives an overview of the content of this Part.
87.Paragraph 40 explains that the effect of a tax year being split into a UK part and an overseas part is as specified in the paragraphs in this Part amending the provisions concerned. But the individual’s tax residence status for the whole year is not affected.
88.Paragraph 41 specifies that this Part does not apply when determining the residence status of personal representatives and applies only in a limited way in establishing the residence status of trustees of a settlement. For trustees see also the amendments to section 475 of ITA and section 69 of TCGA made by paragraphs 102 and 103.
89.Paragraph 42 provides that split year treatment is not intended to affect whether an individual would be regarded as UK resident for the purposes of double taxation arrangements.
Definition of a “split year”
90.Paragraph 43 specifies that a tax year is a split year in relation to an individual if the individual is UK resident for that year and their circumstances fall within any of Cases 1 to 8 (set out in paragraphs 44 to 51). Split year treatment does not apply if the individual is non-UK resident for the year.
91.Cases 1 to 3 deal, broadly, with individuals going abroad. Cases 5 to 8 deal, broadly, with individuals coming to either work or live in the UK.
Case 1: starting full-time work overseas
92.Paragraph 44 specifies that an individual (the taxpayer) will fall within Case 1 for a tax year if they were UK resident for the previous tax year, are non-resident for the following tax year because they meet the third automatic overseas test (see paragraph 14), work sufficient hours overseas (without a significant break) and keep days in the UK within permitted limits over a period to the end of the year. In establishing the number of days the individual spends in the UK, days treated as spent in the UK by virtue of sub-paragraph (4) of paragraph 23 are to be ignored. The permitted limits are found by carrying out the calculation in sub-paragraphs (8) and (9) of paragraph 44.
Case 2: the partner of someone starting full-time work overseas
93.Paragraph 45 specifies that an individual (the taxpayer) will fall within Case 2 for a tax year if they were UK resident for the previous tax year, are non-resident for the following tax year and have a partner who falls within Case 1 for the relevant year or the previous tax year. ‘Partner’ is defined in sub-paragraph (4) of paragraph 52. The taxpayer must join the partner overseas so they can continue to live together while the partner is working overseas. After their deemed departure day, which is the later of the date the taxpayer joins the partner and the date the partner starts to work overseas, the taxpayer must either have no UK home or, if they have homes in both the UK and overseas, must spend the greater part of the time living in the overseas home. The number of days the taxpayer spends in the UK after the deemed departure day must not exceed the permitted limit (which is calculated in the same way as in sub-paragraphs (8)(b) and (9) of paragraph 44).
Case 3: ceasing to have a home in the UK
94.Paragraph 46 specifies that a taxpayer will fall within Case 3 for a tax year if they were UK resident for the previous tax year, are non-resident for the following tax year, and at the start of the tax year had at least one home in the UK but at some point in that year they cease to have any UK home and this continues until the end of that year. In addition, from the date of ceasing to have any UK home the taxpayer must not spend more than 15 days in the UK until the end of the tax year and must, within 6 months of ceasing to have any home in the UK, have a sufficient link with a country overseas (as defined in sub-paragraph (7) of paragraph 46).
Case 4: starting to have a home in the UK only
95.Paragraph 47 specifies that a taxpayer will fall within Case 4 for a tax year if that person was non-resident for the previous tax year and, at the start of the tax year, the taxpayer did not meet the only home test but there comes a point in the year when that ceases to be the case and the taxpayer then continues to meet the only home test for the rest of the tax year. The taxpayer will satisfy the only home test if their only home, or all their homes if they have more than one, is in the UK.
96.In addition, for the part of the year before the point where the taxpayer meets the only home test in the UK, or the earliest of these points if there is more than one, the taxpayer must not have sufficient UK ties to make them UK resident for that part of the year considered in isolation. The UK ties are determined by applying paragraphs 17 to 20 (and Part 2 to the extent that it applies to these paragraphs) and reducing the numbers of days in the Tables in paragraphs 18 and 19 by the factor specified in sub-paragraph (7) of paragraph 47.
Case 5: starting full-time work in the UK
97.Paragraph 48 specifies that a taxpayer will fall within Case 5 for a tax year if they were non-resident for the previous tax year and are coming to work in the UK in circumstances such that they meet the third automatic UK test in paragraph 9.
98.In addition, the taxpayer must not have sufficient UK ties to make them UK resident during the part of the year before the period in which the period of 365 days begins. The UK ties are determined by applying paragraphs 17 to 20 (and Part 2 to the extent that it applies to these paragraphs) and reducing the number of days in the Tables in paragraphs 18 and 19 by the factor specified in sub-paragraph (6) of paragraph 48.
Case 6: ceasing full-time work overseas
99.Paragraph 49 specifies that a taxpayer will fall within Case 6 for a tax year if they were non-resident for the previous tax year because they met the third overseas test (see paragraph 14), was UK resident for at least one of the four years before that, are UK resident for the following tax year (whether or not it is a split year) and satisfy the overseas work criteria for a period from the beginning of the year. The overseas work criteria require the taxpayer to have worked sufficient hours overseas (without a significant break) and to have kept days in the UK within permitted limits up to the end of the period. The permitted limits are found by carrying out the calculation in sub-paragraphs (8) and (9) of paragraph 49.
Case 7: the partner of someone ceasing full-time work overseas
100.Paragraph 50 specifies that a taxpayer will fall within Case 7 for a tax year if they were non-resident for the previous tax year and are UK resident for the following year (whether or not it is a split year) and have a partner whose circumstances fall within Case 6 (see paragraph 49) for the previous tax year or the relevant year. Case 7 will apply if on a day in the relevant year the taxpayer moves to the UK so that the taxpayer and partner can continue to live together.
101.In addition, for the part of the year before the deemed arrival date the taxpayer must not have a home in the UK, or if having homes both in the UK and overseas must spend a greater part of the time living in the overseas home and keep days spent in the UK within the permitted limit. The permitted limit of days in the UK is found by carrying out the calculation in sub-paragraphs (9) and (10) of paragraph 50.
102.The deemed arrival date is the later of the day the taxpayer moves to the UK or the first day of the UK part of the year under Case 6 for the partner.
Case 8: starting to have a home in the UK
103.Paragraph 51 specifies that a taxpayer will fall within Case 8 for a tax year if they were non-resident for the previous tax year, are UK resident for the following tax year (which must not be a split year) and from the point at which the taxpayer starts to have a home in the UK, they continue to do so for the rest of the tax year and all of the following tax year.
104.In addition, for the part of year before the point at which the taxpayer starts to have a home in the UK, they must not have sufficient ties to make them UK resident. The UK ties are determined by applying the Tables in paragraphs 18 and 19 (and Part 2 as far as it relates to those paragraphs) with the adjustments specified in sub-paragraphs (6) and (7) of paragraph 51.
General rules for construing Cases 1 to 8
105.Paragraph 52 defines the meaning of terms used in paragraphs 44 to 51 and sets out how to calculate numbers of days in applying those paragraphs.
106.Sub-paragraph (2) of paragraph 52 specifies that the previous tax year is the one immediately before the tax year that is being considered.
107.Sub-paragraph (3) of paragraph 52 specifies that the next tax year is the one following the tax year that is being considered.
108.Sub-paragraph (4) of paragraph 52 specifies the meaning of a partner for the purposes of this schedule.
109.Sub-paragraph (5) of paragraph 52 specifies the method of rounding where a permitted limit calculation results in a number of days that is not a whole number.
The overseas part
110.Sub-paragraph (1) of paragraph 53 defines “the overseas part” of a split year as the part of the year as defined for the case in question or, if the taxpayer falls within more than one case, as defined in the case that has priority under paragraph 54 or 55.
111.Sub-paragraphs (2) to (9) of paragraph 53 specify the overseas part of a split year as the part of the year which:
for Case 1, begins with the first day on which the individual meets the full-time work overseas criteria or, if there is more than one such period, the part beginning with the first day of the longest of those periods;
for Case 2, begins on the deemed departure day;
for Case 3, begins when the individual ceases to have any home in the UK;
for Case 4, the part before the day on which the individual meets the only home test;
for Case 5, the part before the first day of the period in which the individual works sufficient hours in the UK or, if there is more than one such period, the part before the first of those periods begins;
for Case 6, the part ending with the last day of the period in which the individual satisfies the overseas work criteria or, if there is more than one such period, the last day of the longest of those periods;
for Case 7, the part before the deemed arrival day;
for Case 8, the part before the point in the tax year on which the taxpayer begins to have a home in the UK.
Priority between Cases 1 to 3
112.Paragraph 54 sets out the priority between Cases 1, 2 and 3 which deal with individuals who were UK resident in the previous year (i.e. are ‘leaving’ the UK).
Priority between Cases 4 to 8
113.Paragraph 55 sets out the priority between Cases 4, 5, 6, 7 and 8 which deal with individuals who were not resident in the UK in the previous year (i.e. are ‘coming’ to the UK).
The UK part
114.Paragraph 56 defines the “UK part” of a split year as the part of that year that is not the overseas part (see paragraph 53).
Special charging rules for employment income
115.Paragraphs 57 to 71 amend certain provisions in ITEPA that charge various types of employment income to tax where the charge depends on the residence status of the taxpayer. The individual is charged for the overseas part of a year as if non-UK resident.
116.Paragraph 58 amends section 15 of ITEPA so that general earnings attributable to the overseas part of a split year are not charged to tax unless the earnings relate to duties performed in the UK or to overseas Crown employment that is subject to UK tax. Attribution of earnings between the two parts of the year is to be done on a just and reasonable basis.
117.Paragraph 59 amends section 22 of ITEPA to exclude general earnings taxable as chargeable overseas earnings on the remittance basis (as specified in section 23 of ITEPA) from the charge to tax on general earnings set by the amended section 15 of ITEPA. The provisions of section 22 are further amended by Schedule 46 on ordinary residence.
118.Paragraph 60 amends the definition of chargeable overseas earnings in section 23 of ITEPA to take into account whether a year is a split year. Attribution of earnings between the two parts of the year is to be done on a just and reasonable basis.
119.Paragraph 61 amends section 24 of ITEPA to take into account whether a year is a split year. Attribution of earnings between the two parts of the year is to be done on a just and reasonable basis.
120.Paragraph 62 amends section 26 of ITEPA so that it only applies to foreign earnings taxable on the remittance basis that are attributable to the UK part of a split year. Attribution of earnings between the two parts of the year is to be done on a just and reasonable basis. The provisions of section 26 are further amended by Schedule 46 on ordinary residence.
121.Paragraph 63 amends section 232 of ITEPA so that the deduction for mileage allowance relief is restricted where earnings include ‘excluded earnings’ within section 15 of ITEPA.
122.Paragraph 64 amends section 329 of ITEPA so that the limit on deductions from earnings allowable for a split year takes into account that overseas earnings for the overseas part of the year may have been excluded from the charge to tax.
123.Paragraph 65 amends the definition of ‘other relevant income’ in section 394 of ITEPA. Section 394 provides that the value of a relevant benefit that a person receives under an employer-financed retirement scheme (EFRBS) is chargeable to tax as employment income only to the extent that the value received exceeds ‘other relevant income’ which that benefit gives rise to.
124.Sub-paragraphs (2) and (3) of paragraph 65 provide that when a relevant benefit is received under an EFRBS the following amounts in respect of the EFRBS are included in ‘other relevant income’ to determine how much of the relevant benefit counts as employment income by virtue of section 394(1):
Such amounts chargeable to tax as general earnings or counting as employment income under Chapter 2 of Part 7A of ITEPA (employment income provided through third parties) in any tax year and
Such amounts that would have been chargeable to tax as general earnings but not so chargeable because the employee either was not resident in the UK or was entitled to split year treatment for any tax year and
Such amounts that would have counted as employment income under Chapter 2 of Part 7A of ITEPA but did not so count because the employee either was not resident in the UK or was entitled to split year treatment for any tax year.
‘Relevant benefits’ are defined in section 393B of ITEPA and are most commonly but not exclusively received in connection with retirement. Part 3 of this Schedule makes provisions for split year treatment.
125.Paragraph 66 amends section 421E of ITEPA to set out the conditions attaching to the exclusions from charges under Chapters 2, 3 and 4 of Part 7 of ITEPA that apply to employment-related securities respectively acquired in a tax year of residence (new subsection (1)), in the UK part of a split year (new subsection (1A)) and in the overseas part of a split year (new subsection (1B)). It also amends section 421E so that the charges under Chapters 3A to 3D of Part 7 apply to employment-related securities if they were acquired in the overseas part of a year which is split under Case 1, 2 or 3 (as specified in paragraphs 44, 45 and 46) and, had it not been a split year, all or part of earnings (or if there had been earnings, those earnings) at the time of acquisition would have been general earnings under sections 15, 22 or 26 of ITEPA.
126.Paragraph 67 amends section 474 of ITEPA so that Chapter 5 (apart from sections 473 and 483) of Part 7 does not apply in the circumstances specified to an employment-related securities option respectively acquired in a tax year of residence (new subsection (1)), in the UK part of a split year (new subsection (1A)) and in the overseas part of a split year (new subsection (1B)).
127.Paragraph 68 amends section 554Z4 of ITEPA so that, where a tax year is split, the value of a relevant step is reduced by the amount of the value that is attributable to the overseas part of the year and is not in respect of UK duties. Attribution of value between the two parts of the year is to be done on a just and reasonable basis.
128.Paragraph 69 amends section 554Z6 of ITEPA so that relevant earnings are excluded from the application of section 554Z6 if they are earnings attributable to the overseas part of a split year and are not earnings relating to duties performed in the UK or to overseas Crown employment that is subject to UK tax.
129.Paragraph 70 amends section 554Z9 of ITEPA so that employment income of the UK part of a split year is treated in the same way as employment income of a full year of residence for the purposes of that section. The provisions of section 554Z9 are further amended by Schedule 46 on ordinary residence.
130.Paragraph 71 makes changes to section 554Z10 of ITEPA that are consequential to the changes made to section 554Z4 and introduces a new term ‘the overseas portion’ to identify the employment income not attributable to UK duties. The provisions of section 554Z10 are further amended by Schedule 46 on ordinary residence.
Special charging rules for pension income
131.Paragraph 72 amends section 575 of ITEPA so that, in the case of a split year, the taxable foreign pension income for the year is that arising in the UK part of the year.
PAYE income
132.Paragraph 73 amends section 690 of ITEPA so that an officer of Her Majesty’s Revenue & Customs can authorise a direction under that section if it appears likely to that officer that split year treatment applies in a tax year and that the employee works or will work both in the UK and overseas.
Special rules for trading income
133.Paragraph 75 amends section 6 of ITTOIA so that, in the case of a split year, for the overseas part of the year the section has effect as if the individual is non-UK resident.
134.Paragraph 76 amends section 17 of ITTOIA so that if an individual is carrying on a trade, profession or vocation wholly or partly outside the UK other than in partnership, in the case of a split year the individual is treated as ceasing and immediately recommencing a new trade, profession or vocation at the beginning of whichever is the later of the UK part and the overseas part of the year.
135.Paragraph 77 amends section 243 of ITTOIA so that, in the case of a split year, for the overseas part of the year the section has effect as if the individual is non-UK resident.
136.Paragraph 78 amends section 849 of ITTOIA so that, in the case of a split year, for the overseas part of the year the section has effect as if the partner is non-UK resident.
137.Paragraph 79 amends section 852 of ITTOIA so that if a partner has a change of residence the partner is treated as ceasing one notional trade and immediately commencing another and, in the case of a split year, is treated as ceasing and immediately recommencing at the beginning of whichever is the later of the UK part and the overseas part of the year.
138.Paragraph 80 amends section 854 of ITTOIA so that if a partner has a change of residence the partner is treated as ceasing one notional business and immediately commencing another and, in the case of a split year, is treated as ceasing and immediately recommencing at the beginning of whichever is the later of the UK part and the overseas part of the year.
Special charging rules for property income
139.Paragraph 81 amends section 270 of ITTOIA so that where an individual is carrying on an overseas property business, in the case of a split year, tax is charged only on profits of the business that arise in the UK part of the year. Apportionment of profit between the two parts of the year is to be done on a just and reasonable basis.
140.New subsection (4)(b) of section 270 introduces a rule to determine how capital allowances and balancing charges are taken into account in a split year.
Special charging rules for savings and investment income
141.Paragraph 83 amends section 368 of ITTOIA so that if income within Part 4 of ITTOIA arises to an individual in the overseas part of a split year it is treated as arising to a non-UK resident. Income arising to a non-resident is generally only chargeable if it is UK source income, but this is subject in particular to the rules for temporary non-residents (see Part 4 of this Schedule).
142.Paragraph 84 amends section 465 of ITTOIA so that, in the case of a split year, the individual is not liable to tax under Chapter 9 of Part 4 on gains arising in the overseas part of the year. But see Part 4 of this Schedule in relation to an individual who is temporarily non-resident.
143.Paragraph 85 amends section 467 of ITTOIA to include an additional absent settlor condition under subsection (4), which is that the gain arises in the overseas part of a split tax year applicable to the individual who created the trusts.
144.Paragraph 86 amends section 528 of ITTOIA to take into account days in the overseas part of a split year as well as days in a full year of non-residence in reducing the amount of the gain to be charged. This section is substituted by Schedule 8 to this Act dealing with chargeable event gains but continues in force for policies not covered by the new section. Accordingly, the amendments made by sub-paragraphs (3) to (6) of paragraph 86 apply to the new section 528 and the amendments made by sub-paragraphs (8) to (10) of paragraph 86 apply to the old section 528. If the period being considered is before 6 April 2013 then the reference to a split year is applied as if it referred to the relevant Extra-Statutory Concession then in force (usually ESC A11) – see paragraph 155.
145.Paragraph 87 amends section 528A of ITTOIA which is inserted by Schedule 8 to this Act dealing with chargeable event gains. It provides relief in respect of a deceased person’s policy corresponding to that for individuals in section 528 of ITTOIA. The amendments correspond to those made by paragraph 86.
146.Paragraph 88 amends section 536 of ITTOIA (as itself amended by Schedule 8 to this Act dealing with chargeable event gains) to reflect the changes made to section 528 of ITTOIA.
Special charging rules for miscellaneous income
147.Paragraph 89 amends section 577 of ITTOIA so that if income falling under Part 5 arises to an individual in the overseas part of a split year it is treated under this section as arising to a non-UK resident.
Special charging rules for relevant foreign income charged on remittance basis
148.Paragraph 90 amends section 832 of ITTOIA to provide that an individual who is taxed on the remittance basis will be subject to UK tax on all relevant foreign income remitted in a tax year in which they are UK resident, or, if that year is a split year as respects the individual, on all relevant foreign income which they remit in the UK part of that year.
149.Paragraph 91 amends three provisions in Chapter 2 of Part 13 of ITA as a consequence of the amendments made to section 832 of ITTOIA.
Special charging rules for capital gains
150.Paragraph 93 amends section 2 of TCGA so that, in the case of a split year, an individual is not chargeable to capital gains tax on chargeable gains accruing to the individual in the overseas part of the year. This rule does not apply where gains are charged on a non-resident under section 10 of TCGA and is subject to the rules for temporary non-residents in section 10A of TCGA. The provisions of section 2 are further amended by Schedule 46 on ordinary residence.
151.Paragraph 94 amends section 3A of TCGA so that the period taken into consideration for the purpose of the amount of chargeable gains or chargeable disposals is, in the case of a split year applicable to the individual, the UK part of the year.
152.Paragraph 95 amends section 12 of TCGA so that, in the case of a split year when gains are remitted, they are treated as accruing to the individual in whichever part of the year (overseas part or UK part) in which the foreign gains are actually remitted to the UK. The provisions of section 12 are further amended by Schedule 46 on ordinary residence.
153.Paragraph 96 amends section 13 of TCGA so that, in the case of a split year for a participator in the company, the chargeable gain that accrues to the company in the overseas part of the year is not treated as accruing to the participator.
154.Paragraph 97 amends section 16 of TCGA so that, in the case of a split year for an individual, the loss accruing to the individual in the overseas part of the year is not an allowable loss under the Act.
155.Paragraph 98 amends section 16ZB of TCGA to reflect the fact that foreign chargeable gains remitted to the UK are treated under section 12 of TCGA as accruing to the individual in whichever part of the year (overseas part or UK part) the gains are remitted to the UK.
156.Paragraph 99 amends section 16ZC of TCGA so that the foreign chargeable gains in subsection (3)(a) and (b) respectively take into account that the relevant year may be a split year.
157.Paragraph 100 amends section 86 of TCGA so that, in the case of a split year for the settlor, the chargeable gains treated as accruing to the settlor are treated as accruing in the UK part of the year. The provisions of section 86 are further amended by Schedule 46 on ordinary residence.
158.Paragraph 101 amends section 87 of TCGA so that, if the year is a split year for the beneficiary, the amount on which the beneficiary is chargeable to capital gains tax under this section is the portion of the total that would have been chargeable for a full year of residence attributable on a time basis to the UK part of the year. The provisions of section 87 are further amended by Schedule 46 on ordinary residence.
Trustees of a settlement
159.Paragraph 102 amends section 69 of TCGA, which contains the residence rules of a body of trustees for capital gains tax purposes. Under the statutory residence test, an individual trustee who is resident in the UK for a year is resident for every day in that year, including those days that fall within the overseas part of a split year for that individual. The amendment provides that if the individual is a trustee of a settlement only in the overseas part of a split year then he or she is treated as not resident for that year in applying the residence rules to that settlement. This exception is overridden if the trustee is acting as such in the course of a UK business.
160.Paragraph 103 amends section 475 of ITA which contains the residence rules of a body of trustees for income tax purposes. It makes equivalent changes to those made for capital gains tax by the previous paragraph.
Definitions in enactments relating to income tax and CGT
161.Paragraph 104 amends section 288 of TCGA to insert definitions of a “split year” and “the overseas part” and “the UK part” of a split year.
162.Paragraph 105 amends Part 2 of Schedule 1 to ITEPA to insert cross-references to the ITA definitions of a “split year” and “the overseas part” and “the UK part” of a split year.
163.Paragraph 106 amends Part 2 of Schedule 4 to ITTOIA to insert cross-references to the ITA definitions of a “split year” and “the overseas part” and “the UK part” of a split year.
164.Paragraph 107 amends section 989 of ITA to insert definitions of a “split year” and “the overseas part” and “the UK part” of a split year.
165.Paragraph 108 amends Schedule 4 to ITA to insert entries relating to “split year”, “the overseas part” and “the UK part” of a split year.
