Non Residence and Capital Gains Tax

Alan Pink

We’ve mentioned, elsewhere, a possible political driver for allowing non UK residents to get out of paying tax on property rents. This is, briefly, the wish to encourage foreigners to invest in the UK.

Another such politically based incentive, no doubt, is the fact that non UK residents are not generally chargeable to capital gains tax here. The UK differs from many other jurisdictions in this respect.

But let’s get the exceptions out of the way first. There are two main exceptions to this blanket rule that non UK residents don’t pay CGT. Firstly, there’s the “temporary non residence” rule, and secondly there’s the “business assets” rule.

Temporary Non Residence

In the good old days, it was really pretty easy to get out of paying CGT by living for a comparatively short time abroad. If you were about to make a big capital gain, perhaps from selling your business or a large investment property, “all” you had to do was make sure you were out of the country for a minimum of one tax year, during which year you made the disposal. You could then return to the country with your sale proceeds, completely untaxed.

It was Gordon Brown that stopped this practice, by imposing a five year rule. Basically, what this rule said, was that the gains made whilst abroad became taxable in the year of return, unless you had spent more than five tax years outside the UK.

So, although you can still avoid CGT by emigration for a limited period, you now have to be much more serious about it. Five years is quite a chunk out of anyone’s life, and if you really don’t want to be anywhere but the UK, you would have to be saving an awful lot of tax to make it worthwhile.

You could, though, look at it the other way. Let’s say that the amount of capital gains tax you’re not paying as a result of staying abroad for five years is £1 million. This could be the tax on a not particularly substantial investment property in central London, for example. Spending your five years abroad is equivalent to receiving a tax free gross salary from the UK government of £200,000 a year. So, given that the rule doesn’t say you are not allowed to set foot back in the UK at all, these numbers could well be pretty compelling?

Another important point to make is that the five year rule doesn’t apply to any assets you acquired whilst non resident. So, perhaps perversely, there’s a real incentive to invest in UK property, for example, whilst you’re out of the country rather than waiting until you return. Acquiring the property or other asset at the right time can mean that you can still avoid CGT with a mere one year’s absence.

Business Assets

The other exception to the rule that says non residents don’t pay CGT, is where the non resident owns an asset that is used for the purposes of a trade carried on in the UK through a branch or agency. The most frequent example here, of course, is a property. Let’s say you live in Dubai, but own a nursing home in the UK, and are one of the partners in the business that runs it. This would seem to be fairly and squarely within the business asset rule, so that you’ll still be liable to UK CGT if you sell, even though you may not have set foot in this country.

The purpose of this rule isn’t at all clear, but fortunately, if you are aware of it, it is reasonably easy to plan in such a way to get out of it.

It’s fairly well established, for example, that the tax charge only bites where the person running the trade and the person owning the asset are one and the same. It doesn’t bite if they are different persons, even if those persons are connected. So, if, instead of being part of a partnership, our imaginary Dubai resident care home owner is the shareholder in a limited company which runs the care home, the gain on sale is exempt. There are probably as many permutations of the ways that you can avoid the rule as there are real life situations.

Offshore Trusts

You may think that none of this is of any relevance to you, if you’re UK resident and never plan to emigrate.

It could be highly relevant, though, if you are non UK domiciled, because this is where the ability to put assets offshore, into the hands of actual non residents, actually pays off.

A non UK resident trust is exempt from UK CGT under the normal rule, because the trustees aren’t based here. In the old days, before the furore about offshore trusts led to the rules being drastically tightened, you could make use of this rule quite simply to avoid capital gains tax in almost all practical circumstances. Now, though, the tax breaks of offshore trusts are effectively limited to non UK domiciliaries, or they are, at least, as far as capital gains tax is concerned. But if you’re fortunate enough to be a member of this club, the tax breaks are pretty substantial.

In short, the offshore trust enables you to avoid CGT on all of your assets, including those situated in the UK, providing you can get the assets into the trust without triggering too large a gain, and providing you are in a position to claim “the remittance basis”. Any non UK domiciliary with a substantial asset base should be considering the use of offshore trusts.

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