Exceptional Circumstances and UK Tax Residency

The statutory residence test (SRT) is essential for determining UK tax residency. A recent Court of Appeal ruling clarified that “exceptional circumstances” can include a moral obligation that may prevent someone from leaving the UK. This decision has a significant impact on taxpayers who split their time between the UK and abroad, particularly those seeking to maintain non-resident status for tax purposes.

The Facts of the Case

In the 2015/16 tax year, the individual at the heart of the case moved to Ireland and declared herself non-resident in the UK. However, due to serious family issues involving her twin sister—who was suffering from health and well-being problems—she made frequent visits to the UK. These visits caused her to exceed the permitted number of UK presence days under the SRT by five days.

As a result, HMRC determined that she was a UK resident for the year and amended her tax return to reflect additional tax due on a large dividend payout from a UK company, amounting to approximately £3.15 million.

The taxpayer argued that the extra days she spent in the UK were due to exceptional circumstances—specifically her moral and familial obligation to care for her twin sister and her sister’s children, which she claimed prevented her from leaving the UK.

Understanding the Statutory Residence Test

Under the SRT, individuals who have not been UK residents in the previous three tax years can generally spend up to 45 days in the UK without becoming UK tax residents. However, an exception is available where additional days are spent in the UK due to exceptional circumstances beyond the individual’s control.

To apply this exception, the taxpayer must meet several criteria:

• The circumstances must be truly exceptional.
• They must be beyond the taxpayer’s control.
• The taxpayer must have intended to leave the UK but was unable to do so.
• The number of days disregarded under this exemption cannot exceed 60 in a tax year.

Tribunal and Appeal Journey

During the first hearing at the First-tier Tribunal (FTT), the taxpayer successfully argued that her sister’s condition, which included mental health issues and a risk of self-harm, was an exceptional circumstance. The tribunal agreed that the sister needed to be in the UK and that she could not leave the country.

Later, the Upper Tribunal (UT) reversed this decision. It concluded that the evidence was insufficient to demonstrate that the taxpayer could not physically or legally leave the country. The UT decided that moral duties alone do not constitute exceptional circumstances unless they involve legal or physical pressure.

This led to another appeal to the Court of Appeal.

Court of Appeal Decision

The Court of Appeal restored the original FTT ruling, confirming that:

• The determination of exceptional circumstances is a matter of factual judgment and is within the scope of the FTT’s responsibilities.
• The term “exceptional” should be interpreted according to its ordinary English meaning and not narrowed to legal or physical barriers alone.
• Moral and conscientious obligations can, in some situations, genuinely prevent a person from leaving the UK.

This outcome marked a significant shift in how exceptional circumstances can be assessed under the SRT, opening the door for moral and familial duties to be considered valid reasons for exceeding day limits.

Irish Tax Considerations

The taxpayer had moved to Ireland and relied on its tax residency rules, which are based strictly on physical presence. A person becomes an Irish tax resident if they spend either:

• 183 days in Ireland in a single tax year, or
• A total of 280 days over two consecutive years, with at least 30 days in the second year.

As Ireland does not require domicile for tax residency on worldwide income, and provided the taxpayer was not ordinarily resident or domiciled, she would have been taxed only on Irish-sourced income and any foreign income remitted to Ireland during her non-residency.

The case underscores how individuals can use geographic proximity and travel flexibility to remain resident in Ireland while limiting their UK tax exposure, so long as the SRT is not breached.

Implications for UK Taxation of Dividends

During her year of living outside the UK, the taxpayer received significant dividends from a UK company. UK tax rules typically allow some income, including UK dividends, to be disregarded for tax purposes if the taxpayer does not return to UK residency within a specified timeframe. However, if the taxpayer becomes a UK resident again soon after being non-resident, the income that was ignored may become taxable. This is unless it qualifies as “post-departure trade profits.” These profits are earned while the taxpayer is genuinely non-resident and are not taxable when they return, as long as specific conditions are met.

This makes it vital to correctly time dividend payments and maintain evidence of the source of the profits to mitigate the risk of retrospective taxation.

Practical Considerations for Advisers

1. Detailed Record-Keeping: Maintain a clear, day-by-day account of travel, purpose of visits, and personal obligations.
2. Robust Evidence: When relying on exceptional circumstances, ensure documentation is thorough—medical records, family correspondence, and travel records can support claims.
3. Review SRT Limits Regularly: Even a slight discrepancy in day count can result in substantial tax liabilities.
4. Plan Dividend Distributions Carefully: For individuals planning to leave the UK, coordinate dividend timing with periods of non-residency to avoid potential tax issues.
5. Consider Irish Residency Rules: For clients using Ireland as a temporary base, monitor physical presence to maintain tax residency.

This case sets a precedent that moral obligations can be recognised as exceptional circumstances under the SRT. It demonstrates the importance of factual context, careful planning, and strategic use of residence rules across borders. For high-net-worth individuals and international taxpayers, the decision provides welcome clarity—but also reinforces the need for rigorous planning and expert advice.