Split year treatment: could it reduce your tax bill?

You may dream of going to work overseas for a year or more, whether to earn a higher income or just to enjoy living and working in another country. You may even have already left the UK. If so, you should find out about split year treatment and how it could reduce your UK tax bill.

What is split year treatment?

Split year treatment could reduce your UK tax liability on your income and gains if you leave to go and live and work overseas or you move back to the UK after having lived and worked overseas.

Under the UK SRT (Statutory Residence Test), someone is either UK resident or non-UK resident for the whole UK tax year, which starts on 6 April and ends on the following 5 April. If you’re UK resident, your income and any gains are subject to UK Income Tax and Capital Gains Tax throughout the entire tax year.

However, under the SRT, some can benefit from split year treatment, which can only apply in a tax year of UK residence, and must be preceded or followed by at least one tax year of non-UK residence.

• If you were UK tax resident for some of the tax year, but for the rest you were non-resident, you may be able to split the tax year in two, so you’re only liable for UK tax on foreign income or gains for when you were UK tax resident, rather than the whole tax year.
• That would mean, when you were not UK resident, foreign income and gains are not subject to UK Income Tax and CGT, although any UK income and gains would be taxable in the UK.
• Split year treatment can also apply where someone moves to live and work in the UK, so they only pay Income Tax and CGT when they are UK resident.

Need to know! If you’re overseas for less than a full tax year before you come back to the UK, you cannot take advantage of split-year treatment, you’ll pay full UK tax on taxable foreign income and gains, which you’ll need to report via Self Assessment.

The Statutory Residence Test

In the UK, you would normally be considered UK tax resident if you meet the criteria set out in the Statutory Residence Test (SRT). You can use the SRT to work out your residence status for a tax year. Each tax year is considered separately, so you can be resident in the UK one year but not the next, etc.

To determine whether you are UK resident or not, the SRT assesses the time you spend and (if relevant) work in the UK, as well as your connections to the UK (eg family, business interests, etc). The SRT is split into automatic overseas tests, automatic UK tests, a sufficient ties test, application of the SRT to deceased persons and split years. 

What if you’re not eligible for split year treatment?

If you’re UK tax resident but ineligible for split year treatment within a tax year during which you arrive in the UK or leave, you may well be able to benefit from double taxation agreements if the UK has one with UK country you went to or came from, which can reduce your tax liability, giving you the same or a similar outcome as split year treatment.

The split year rules are complex, so seeking tailored professional advice is recommended. Don’t automatically assume that split year treatment will apply to your circumstances, because it might not. And CGT can be payable even if you’re non-resident in the UK.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.