In this article, we delve into the concept of split year treatment for UK tax payers; a tax provision that could potentially save you from paying unnecessary tax by dividing the tax year into two distinct periods. This guide will explore how split year treatment works, who can benefit from it, and the implications it may have on your tax liabilities.
Understanding Split Year Treatment
Split year treatment is a tax concept used to allocate income tax liabilities in the UK for those who either move to or leave the UK partway through a tax year. It effectively divides the tax year into a ‘UK part’ and an ‘overseas part’, allowing you to be taxed as a UK resident for part of the year and as a non-resident for the other part. On this basis, for the overseas part of the tax year the individual would remain subject to tax in the UK only on UK sourced income – it is important to note this includes dividends arising from the UK which would only be potentially tax free where there are complete years of non-residence.
Typically Split Year Treatment for tax is used by business owners or employees who are relocating abroad. It is important to note that split year treatment is not automatic and must be explicitly claimed in your personal tax return. Correctly taking advantage of Split Year Treatment can deliver a numerous tax benefits, particularly when planned for in advance. ESDG Accountancy have assisted numerous individuals who have looked at relocating their business to Dubai to save tax, where Split Year Treatment regularly features.
When does it apply?
The application of split year treatment hinges on specific circumstances detailed in the Statutory Residence Test (SRT), which can become complex depending on individual situations. Typically, split year treatment comes into play under two main scenarios:
- Arriving in the UK: If you become a UK resident partway through the tax year, you may only be taxed on worldwide income received while you were a UK resident.
- Leaving the UK: Conversely, if you leave the UK to live or work abroad, you could be taxed as a non-resident from the date of your departure, provided certain conditions are met.
Eligibility for Split Year Treatment
Eligibility for split year treatment is not automatic and depends on a number of factors including your previous and future tax status, your ties to the UK, and whether you have a home in the UK or abroad.
The criteria is different depending on if you are moving into or out of the UK. HMRC consider that there are 8 cases:
Leaving the UK:
- Case 1: the individual starts full-time work overseas part way through a tax year.
- Case 2: the individual is accompanying a partner who takes up full-time work overseas part way through a tax year.
- Case 3: The individual ceases to have a home in the UK part way through a tax year
Moving to the UK:
- Case 4: the individual starts to have a home in the UK and has no home overseas.
- Case 5: the individual starts to work in the UK.
- Case 6: the individual comes to the UK after ceasing work abroad.
- Case 7: the individual accompanies a partner who satisfies Case 6.
- Case 8: the individual starts to have a home in the UK which continues throughout the following tax year.
If an individual’s situation covers multiple cases split year criteria then each case must be ranked by priority per HMRC rules. This can add a level of complexity when determining the exact date that split year treatment will apply.
Benefits of Applying Split Year Treatment
Applying for split year treatment can provide significant tax relief, especially in scenarios involving double taxation. Here are a few benefits:
- Prevention of Double Taxation: Particularly for those moving between countries that have a double tax agreement with the UK, split year treatment can help prevent income earned abroad from being taxed both in the UK and in the new country of residence.
- Tax Savings: By only being taxed as a UK resident for part of the year, you can potentially reduce your overall tax burden, particularly if your income varies significantly between the two parts of the year.
Split year treatment opens up various tax planning opportunities where income sources can be accelerate or delayed to ensure they fall in the non-UK part of the year.
Example Case Study
Consider a professional moving from Dubai to the UK on 1st September 2024. If they meet the conditions for split year treatment, they would only be liable for UK tax on their worldwide income from the date they arrived in the UK, being 1st September 2024, move until the end of the tax year on 5th April 2025. This could result in substantial tax savings, particularly if their income sources are diversified and subject to different tax treatments in each country. If the individual understood this in advance they could look to accelerate income so it is earned in the non-UK part of the year.
Seeking Professional Advice
Given the complexity of the rules surrounding split year treatment and the potential for large tax liabilities if it is used incorrectly, it is advisable to seek professional advice for a UK Chartered Accountant.
Split year treatment can offer significant benefits for those who qualify, potentially saving substantial amounts in tax liabilities during years of transition between countries. It is a valuable tool in the arsenal of international tax planning, but it requires careful consideration and professional guidance to ensure it is applied correctly and efficiently.
If you think you might be eligible for split year treatment, or if you are planning a move to or from the UK, do not hesitate to reach out to us for expert advice.
Please contact us if you would like to discuss a Split Year Treatment tax enquiry.
ESDG Accountancy can help with Split Year Treatment.
We continue to assist many clients with their residency and split year tax matters.
Please send your enquiry below and a Chartered Accountant will respond to your request within 24 hours. We usually will seek to arrange a phone call to discuss the specifics of your situation in greater detail.
