Transferring property to children as a non resident to avoid capital gains tax and inheritance tax

Question:

I along with my wife jointly own a selection of properties. These include: Block of 3 flats - valued at 500,000 - let

4 lease hold flats value £440,000 - let

Flat in Oxford - value £300,000 -- not let

Other investments are mostly cash investments of around £200,000.

We've kept borrowings to a minimum, and have debt of £300,000 in total over all the properties.

We're looking to transfer at least half of the above to our children over the next few years, and was hoping you could assist in avoiding Inheritance tax or/and capital gains tax.

We're happy to become expats but would need to know that we could come back to the UK for an emergency (eg for illness or funerals etc). Do we need to sell all of our properties and other investments such as UK bank accounts?

Answer:

You could become non UK resident and non UK ordinarily resident and avoid a UK capital gains tax charge on a disposal of the properties provided your absence overseas exceeded five complete tax years. There is a 90 day limit, and you would certainly need to ensure this was met over the course of four years (as it's taken as an average). Generally speaking where you are looking to return to the UK at the end of the five year absence it is generally recommended that the visits to the Uk are kept to a minimum.

Visits to the UK for family bereavement etc will count towards the limit. It is however important that the UK visits couldn't be said to be part of your ongoing lifestyle, otherwise they could continue to regard you as UK resident/ordinarily resident. Therefore, you should keep a log of the reasons for visits to the UK to be certain of your non residence status. You would not, however, need to close UK bank accounts.

When looking at the residence position for a tax year an individual is not normally resident for part of a tax year.

However, where a person leaves the UK to take up a "permanent" residence elsewhere he is regarded as resident in the UK from 6 April to the date of his departure and non resident for the period that he is overseas. Therefore you would be looking to show that your absence from the UK was permanent.

Permanent in this context means for at least three years. Suitable evidence would include purchasing a property overseas and the disposal/letting of the UK residence.

Becoming non resident would effectively remove any charge to CGT, but in terms of Inheritance tax ('IHT') the same rules would apply as if you were UK resident because you would be likely to remain UK domiciled, even if non resident.

If you were prepared to lose your UK domicile, avoiding IHT would be relatively straightforward, as you could simply transfer any UK assets/property into an offshore company. This would then exclude the assets from the charge to IHT. Losing your UK domicile would be much more difficult than losing UK residence and would entail severing most of your ties with the UK. However, if you are retaining your UK domicile, avoiding IHT will be more complex.

One option would be to simply gift the properties to your children. Usually a transfer of investement properties would realise a chargeable gain, however as a non resident you would be exempt.

From an IHT perspective, the transfer would be a potentially exempt transfer ('PET') and provided you/your wife survived for seven years the amount gifted would be excluded from your estates. Note that in order to be excluded from your/your wifes estate you would each need to have not retained any benefit of the properties (eg the right to receive rent, to disposal proceeds etc).

You could of course dispose of the properties to a third party and transfer the proceeds to children as a PET if required.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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