Selling UK business assets as a non UK resident free of UK capital gains tax
It's well known that anyone moving abroad and becoming non UK resident can avoid UK capital gains tax ('CGT') providing they remain abroad for at least five complete tax years.
Providing they meet this requirement and are actually non UK resident in the tax year of disposal they will be exempt from UK CGT in most cases.
One of the exceptions to this applies where a non resident is selling assets used for the purposes of a UK business. If this is the case the assets remain within the scope of CGT, even for a non UK resident.
The actual provisions state that the UK assets are within the scope of CGT if used for the purposes of a UK branch or agency trade. This is akin to a UK permanent establishment and therefore there would be a physical presence in the UK (which would in any case apply if UK assets were being sold).
It's pretty obvious that where an individual is non UK resident and carries out a UK trade via a UK business premises, any disposal of those business premises would remain within the charge to CGT.
However, what if the non resident ceased to actually trade from the property before it was sold? They may for example have used a property for a trade but then ceased to trade a number of years before the disposal (then letting it out). Would this still be subject to CGT?
It's necessary to look at the actual charging provisions in this case.
The CGT provisions state that there will be a charge to CGT on assets used in a UK trade if:
at the time of the disposal the trade continues to be carried on through the branch or agency in the UK, and
the asset is situated in the UK, and
at or before the time of the disposal the asset has been
- used in or for the purposes of the trade or
- used or held or acquired for the purposes of the branch or agency
Therefore each needs to be satisfied for there to be a charge to CGT. It's necessary for this that '…at the time of the disposal the trade continues to be carried on through the UK branch or agency trade…'. Therefore if the trade had ceased based on this there would be no UK gain and the non residents exemption would apply. However, this is too easy and it is a relatively simple way to avoid CGT on UK business assets. Anyone planning to emigrate could simply avoid CGT by either transferring assets abroad before disposing of them or by delaying disposal until after the end of the tax year in which the branch or agency activities ceased. New provisions were therefore introduced so that there is a 'deemed disposal' of the UK branch or agency assets where a 'chargeable asset' ceases to be a chargeable asset because they cease to carry on the trade through a branch or agency. So where you have an asset that is used by a non resident for the purposes of a trade, the cessation of that trade would then crystallise the capital gain. This would be based on a deemed disposal with proceeds equivalent to the market value. The various UK allowances and exemptions (eg Entrepreneurs Relief and/or annual CGT exemption could also apply). If though you stopped using the asset for the purposes of a UK trade before you left the UK its difficult to see how this could apply. In this case it wouldn't be a 'chargeable asset' (and therefore subject to the special anti avoidance rule above) in any case because it wouldn't be used for the purposes of a UK trade as a non UK resident. Note that there is no scope for this rule to apply to property investors. It only applies to traders and therefore to be caught by this a property dealer would need to be trading in UK property and also selling an asset that was used for the purpose of that trade (eg a UK office building). A popular way to avoid these provisions charging CGT on non-residents is to incorporate a business prior to sale. This way you could sell the shares in the UK company rather than the underlying business assets. A disposal of shares would not be caught by the branch or agency charge and would therefore be free of CGT for non UK residents (subject to the 5 year anti avoidance rule).
- used in or for the purposes of the trade or
- used or held or acquired for the purposes of the branch or agency
Therefore each needs to be satisfied for there to be a charge to CGT. It's necessary for this that '…at the time of the disposal the trade continues to be carried on through the UK branch or agency trade…'. Therefore if the trade had ceased based on this there would be no UK gain and the non residents exemption would apply. However, this is too easy and it is a relatively simple way to avoid CGT on UK business assets. Anyone planning to emigrate could simply avoid CGT by either transferring assets abroad before disposing of them or by delaying disposal until after the end of the tax year in which the branch or agency activities ceased. New provisions were therefore introduced so that there is a 'deemed disposal' of the UK branch or agency assets where a 'chargeable asset' ceases to be a chargeable asset because they cease to carry on the trade through a branch or agency. So where you have an asset that is used by a non resident for the purposes of a trade, the cessation of that trade would then crystallise the capital gain. This would be based on a deemed disposal with proceeds equivalent to the market value. The various UK allowances and exemptions (eg Entrepreneurs Relief and/or annual CGT exemption could also apply). If though you stopped using the asset for the purposes of a UK trade before you left the UK its difficult to see how this could apply. In this case it wouldn't be a 'chargeable asset' (and therefore subject to the special anti avoidance rule above) in any case because it wouldn't be used for the purposes of a UK trade as a non UK resident. Note that there is no scope for this rule to apply to property investors. It only applies to traders and therefore to be caught by this a property dealer would need to be trading in UK property and also selling an asset that was used for the purpose of that trade (eg a UK office building). A popular way to avoid these provisions charging CGT on non-residents is to incorporate a business prior to sale. This way you could sell the shares in the UK company rather than the underlying business assets. A disposal of shares would not be caught by the branch or agency charge and would therefore be free of CGT for non UK residents (subject to the 5 year anti avoidance rule).