An increasing number of people live on cruise ships. They sell or rent out their main residence and spend their days living on the waves. The benefits are various – no meals to get yourself, entertainment every night, different ports to discover, even your washing done. You can even own a ‘villa at sea’, allowing residency aboard a ship for the duration of its life (or a minimum of 15 years). But what are the tax implications, if any? Unfortunately, UK tax liability is primarily determined by tax residence, not lifestyle, therefore a person may live on a ship and still be UK tax resident.

The UK tax system

Once residency is established, UK residents are taxed on their worldwide income/gains whereas non-UK residents are taxed only on UK-sourced income (rents, dividends, bank interest) and UK gains (property disposals); foreign income/gains are untaxed in the UK for non-UK residents.

Statutory residence test (SRT)

Determination of UK tax residence can be complicated and someone ‘living’ on a cruise ship must still assess their residence using the same rules as anyone else. Living on a cruise ship can support a non-UK resident tax position, but only if the steps comprising the SRT are not satisfied.

• The first step determines if an individual will be considered automatically resident.
• The second step determines if an individual will be considered automatically non-resident. There are three automatic overseas tests under this step and if any one of these tests is met the individual will be deemed non-UK resident for that year.
• The third step considers whether the individual meets either the second or third automatic UK tests. If any one of these is met the individual will be deemed UK resident for the year.
• The fourth and final step determines if an individual will be considered resident or non-resident under the ‘sufficient ties’ test.

First step

Under this test an individual will be automatically UK tax resident if:

• they spend 183 days or more in the UK in a tax year; or
• there is at least one period of 91 consecutive days (at least 30 of which fall in the relevant tax year) when their only home is in the UK and they spend a sufficient amount of time in that home in any one year.

Second and third steps

If the answer to the above is ‘no’, that is not the end of the process. The next step is to consider the automatic overseas tests which determine UK residence if less than 16 days were spent in the UK, or the individual was UK resident in one or more of any of the previous three tax years, or more than 46 days were spent in the UK (and the individual was non-resident in the previous three tax years).

Fourth step

If the above tests fail to give a clear answer, the ‘sufficient ties test’ applies, combining days spent in the UK with ties (connections). Ties include the following:

• Family tie: spouse, civil partner, cohabiting partner or minor child (under 18) is UK tax resident.
• Accommodation tie: UK accommodation (owned, rented or belonging to a friend) available for more than 91 consecutive days and more than one night was spent there. The test is satisfied in the case of a close relative’s home if more than 16 nights are spent there during a tax year. Hotels/Airbnb usually qualify if long-term.
• Work tie: more than 40 days working more than three hours in the UK during the tax 90-day tie: Spending more than 90 midnights in the UK in either of the previous two tax years (not combined).
• Country tie: UK is the country in which the individual spends most days during the tax year.

Therefore, to be non-UK resident, the individual on the cruise ship must:

• limit UK days according to the SRT day-count; and
• reduce UK ties, such as:
  • a UK home;
  • family in the UK;
  • substantive UK work; and
  • significant UK presence in prior years

Merely selling a house and living on a ship is not sufficient to gain non-UK residency if other UK ties remain.

Practical point

Note that time spent on a cruise ship does not count as time outside the UK if the ship is in UK territorial waters at midnight on any counted day. Therefore, a cruise away from the UK should be the preferred travel option to avoid tax complications (e.g. a cruise of the Southern Hemisphere starting in the USA and ending in the USA).

Partner note:

Sch 45 Finance Act 2013

HMRC’s Residence and FIG Regime Manual at RFIG20000 – Statutory Residency Test