Part 1 - CGT and non-residence: more planning opportunities
POSTPONING DISPOSALS AND AVOIDING CGT
An emigrant avoids capital gains tax if a disposal is delayed until the tax year following departure.
Therefore if Paul in the above example needed to postpone the disposal until the 2012/13 tax year, no contract should be entered into until after 5th April 2012.
One key trap to watch out for is that, with the exception of land, Revenue and Customs may contend that there was an oral contract to sell prior to emigration. You should remember this and make sure there is no evidence that would support the taxman's argument.
There are usually two possible methods of postponing a disposal: using conditional contracts and using options.
Conditional Contracts
A disposal under a conditional contract only occurs when the condition is satisfied. A contract is only conditional if:
• The condition is satisfied prior to the contract being 'completed', and
• It is within neither party's direct power to bring it about.
A good example of a conditional contract is a contract that is subject to a third party consent, for example the granting of planning permission.
Options
Options can be either call options, whereby the purchaser is entitled to call on the vendor to sell the asset, or put options in terms of which the vendor can require the purchaser to buy the asset. Options can therefore be used to delay the actual contract date, as the contract is not concluded until the option is satisfied.
AVOIDING CGT ON BUSINESS ASSETS
There is one key exception to the general rule that emigration takes UK assets out of the UK capital gains tax net, namely where a 'branch or agency trade' exists.
A branch or agency trade can exist when any business is being run from the UK. Therefore someone who leaves the country and retains a business and appoints a manager to run it, may find that a branch or agency trade exists.
In addition, a branch/agency trade exists if the emigrant is a partner in a UK partnership with capital gains apportioned between the partners. In this case, gains on UK assets are subject to UK capital gains tax if they are used by either the branch or trade.
A problem therefore arises where an individual operates via an unincorporated business (for example, a sole trader business or partnership). Once the proprietor leaves the country, the business will usually become a branch or agency trade and gains on the business assets will accordingly remain subject to capital gains tax.
There are two common ways around this difficulty:
• Sell the business before you emigrate and reinvest the proceeds in the assets of a new business situated abroad. In these circumstances, roll over relief may be available and the gain arising on the business assets can be effectively rolled over and, as the emigrant remains non-resident, the gain would be completely sheltered.
• Transfer the business to a company prior to leaving the country. If the transfer includes all the assets of the business, the business is a trading business and shares in the company are the sole consideration received by the individual, then the capital gain is rolled over against the cost of the company shares. As the shares are not a business, there will be no branch/agency capital gains tax charge when you sell the shares.
Care must, however, be taken with the latter method, particularly given the large number of cases coming before the courts regarding anti-avoidance. To avoid attack under anti-avoidance principles, the transfer to the company should take place before the sale is negotiated.
SALE OF A FORMER HOME
An individual leaving the UK may decide to not dispose of a UK home until after they have left the UK. It should be remembered that there is no UK capital gains tax on the sale of a main residence. As a result, sale of such a property whilst UK resident is still a good option.
On becoming resident in another country, care must be taken as regards the tax liability in the new country of residence, as many countries charge residents capital gains tax on their worldwide disposals.
In such a case, it is necessary to identify whether the UK has a double tax treaty with the country in question as these treaties can determine which country has sole taxing rights. The problem in relation to property is that under the terms of most double tax treaties, 'immovable property' can be taxed in the country where the property is located (in other words, the UK) as well as taxed overseas.
Therefore although no UK liability would arise provided you satisfied the five-year test (in other words, you did not become UK resident within five tax years of the date of departure), the overseas country where you are now resident could potentially tax your gains.
Example
Catriana emigrated to Spain during the 2011/12 tax year. She has purchased a property in Spain and has become a Spanish resident. She still owns a UK property, which has increased in value significantly. She has decided to sell the UK property and needs to know whether there will be any UK or Spanish tax on a disposal of the property.
Under the terms of Article 13(1) of the UK-Spain double tax treaty (see Appendix I), the capital gain arising on the sale of the property can be liable to tax in the country where the property is situated. This is further developed by Article 24(4), which provides that the property will be treated as a UK source, and therefore liable to UK tax.
Since an individual who is neither resident nor ordinarily resident in the UK is exempt from UK capital gains tax (unless the assets are used in connection with a UK trade), the disposal would escape tax altogether in the UK. However the gain would need to be declared for Spanish tax purposes as the treaty gives taxing rights over land to the country of residence as well as the country where the land is located.
FAVOURABLE TAX JURISDICTIONS
There are a number of countries that offer favourable tax regimes. Given the complexities involved, and the differing approaches taken by other tax authorities, it is essential that you obtain detailed and specific advice from a suitably qualified tax specialist in the relevant country.
In addition, tax should not be your main consideration when considering a move abroad. Other factors that you should probably consider include political and economic stability, protection of property rights, guarantees against asset expropriation, the level of government regulation, investment concessions, currency restrictions, domestic crime levels, access to quality healthcare, climate, distance from the UK/family, communication and transportation, banking secrecy and ease of obtaining residence.
One of the biggest dangers facing those who move abroad but retain significant UK assets and income is currency movements. The Euro, for example, has gyrated wildly against the Pound since its launch and other currencies behave even more erratically. This can play havoc with your personal financial planning.
It's also critical to avoid substituting a lower tax bill for other financial burdens, such as expensive property and high living costs in your new country of residence.
Some of the countries that offer favourable tax regimes include:
The Cayman Islands
The Cayman Islands impose no taxes other than import duties and stamp duty. In addition, they have no double tax treaties.
Andorra
There are no taxes in Andorra. The only things you have to watch out for are rates and some property transaction taxes. There is no double tax treaty with the UK. It has, however, signed numerous exchange of information treaties with various other countries.
Gibraltar
The main benefit of Gibraltar is that there is no capital gains tax or VAT. Income tax is, however, payable. Individuals pay quite high taxes on their income in Gibraltar unless they can take advantage of 'High Net Worth Individual' status (also known as category 2 status), which is granted to certain wealthy individuals. Income tax is usually payable at rates of up to 40% but High Net Worth Individuals are assessed on only a fraction of their total taxable income.
Cyprus
Cyprus charges both income tax and capital gains tax, although capital gains tax does not apply to profits from the sale of overseas property by non-residents, or to the profits of residents who were non-resident when they purchased the asset. The capital gains tax rate is 20%.
Malta
Individuals who are domiciled and ordinarily resident in Malta pay income tax on their worldwide income. Individuals who are domiciled elsewhere, and who are resident but not ordinarily resident in Malta pay tax at 15% on their income arising in Malta, or remitted there, but not on capital gains.
Monaco
Monaco levies no personal taxes, although there are inheritance and gift taxes, along with business profits tax. VAT is also charged on goods and services.
USING ENTERPRISE INVESTMENT SCHEMES
A capital gains tax bill can be deferred by reinvesting in Enterprise Investment Scheme Shares. The ability to defer capital gains tax by reinvesting in venture capital trusts was scrapped from April 6 2004.
An important point to note is that any relief given to an individual on shares acquired by him (or in certain circumstances his spouse) may be clawed back if the individual ceases to be resident or ordinarily resident in the UK -- unless for overseas employment on a short secondment.
Therefore any gains deferred under the Enterprise Investment Scheme will be brought back into the tax net.
Example
Jack sold his investment company and ended up with a taxable capital gain of £500,000. He reinvested this gain in qualifying Enterprise Investment Scheme shares in order to defer paying capital gains tax. He has purchased a property in Majorca and intends to spend significant periods in Spain. Jack needs to be very careful that he does not spend too much time abroad and become UK non-resident. If he does there could be severe consequences:
• He will be non-resident, so still liable to UK income tax on any UK source income.
• He has no overseas income and so will not benefit from the exemption from UK income tax on overseas income.
• He will still be ordinarily resident and within the scope of UK capital gains tax.
• He will still be UK domiciled and therefore within the scope of UK inheritance tax.
• He will have a 'deemed gain' in relation to the gain held over in the tax year of departure (£500,000). Given that his cash is tied up in Enterprise Investment Scheme shares this could cause severe cash flow problems.
OFFSHORE INVESTMENTS FOR UK RESIDENTS
What about the typical British person who is both UK resident and UK domiciled -- are there any offshore techniques they can use to minimise UK tax?
The first point to bear in mind is that, as a UK resident, you will be taxed on your worldwide income and gains under domestic tax legislation. Therefore, the scope to generate returns in a more tax-efficient manner is limited.
Example
Herbert a UK resident and domiciled individual wants to invest in overseas equities. He decides to invest purely through an offshore broker, and will invest in shares quoted on the US stock market. He will be fully liable to UK capital gains tax on his profits.
However, there are specific exceptions contained within the tax legislation that apply to offshore bonds.
Offshore Bonds
Qualifying offshore bonds allow investors to 'roll up' their returns -- this means tax is only paid at the end of the investment period (usually five to 10 years) when the investment is cashed in.
A withdrawal of up to 5% can be taken each year, with tax only payable at the end of the investment period. If you exceed the 5% limit a tax liability is triggered.
It is also possible to switch in and out of different investment funds within an offshore bond wrapper without these transfers being classified as chargeable events for capital gains tax purposes.
Investment in these qualifying offshore bonds can prove highly tax effective. Investments grow virtually tax free within the fund, benefiting from what is known as 'gross roll up'. This means that, rather than an investment being taxed on an ongoing basis, the funds grow without the encumbrance of tax.
Whilst there may be personal tax to pay when the investment is cashed in, proper tax planning, such as arranging your affairs so that you are non-UK resident at the date of encashment, can help reduce this.
Gross roll up can lead to a dramatic increase in the amount of money invested.
Capital gains tax is not levied within the fund on offshore bonds, so an investment may be actively managed focusing solely on the investment considerations rather than being subject, as in the UK, to capital gains tax within the fund.
Savings can often be made with offshore bonds since investors can buy and sell qualifying investments held within the bond without any liability to capital gains tax. Many offshore bond providers offer links to third-party, household name, investment companies, so finding a suitable investment shouldn't be difficult.
However, after the 2008 and 2009 Budgets, HMRC announced changes that will affect when certain offshore funds will be able to benefit from the income tax and gross roll up treatment described above.
These changes are quite technical, and as such it would be advisable to seek confirmation from any potential fund provider whether the chosen fund falls within the above tax rules.
If the fund does not qualify for the gross roll up, the investment would be treated just as any other UK investment. This would eliminate the UK tax benefit as purchases and disposals of the investments or units within the bond would be subject to UK capital gains tax.
Overseas investments, and in particular the taxation of offshore bonds, is a complex area, and you should therefore take professional advice when considering your investment strategy.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
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.
In this book we look at a variety of tax planning strategies that arise from the terms of the UK's double tax treaties. This book is updated for the 2022 changes....keep reading
For many people the family home is the most valuable asset they have. As such protecting its value will be of key importance. In this tax guide we look at the key tax planning opportunities for the family home and private residences....keep reading
This brand new (December 2022) edition of our best selling offshore tax planning book tells you what you need to know to take advantage of offshore opportunities and slash your UK tax bill. It's a pretty comprehensive look at plenty of UK and offshore tax planning techniques including residence, domicile, emigration, using offshore companies and trusts, buying property overseas and much more....keep reading
Inheritance tax is a particularly nasty tax as it's a tax on your capital that you've accumulated from your after tax earnings. In this book we look at some of the top ways you can legally reduce your inheritance tax liability....keep reading
This book looks at a number of tax planning issues for company owners and considers both corporate and personal tax planning opportunities available. It is updated for the latest changes for 2022/2023....keep reading
Buy-To-Let ("BTL") landlords have to consider Income Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax on their property holdings. In this book we look at tax planning techniques that all BTL landlords can consider to reduce the amount of these taxes they pay....keep reading
This guide is essential reading for anyone providing digital or online supplies of goods and services. It looks at the international tax treatment from both an income tax/corporate perspective as well as VAT/GST....keep reading
The aim of this guide is to give context to the considerations for 99% of international tax planning scenarios. Without understanding the information contained here, you will find it very difficult to apply or structure any kind of tax planning to your international transactions/assets....keep reading