| April 2006
Q:
My wife and I have decided to leave the UK permanently and move to warmer
climes. We jointly own investment properties, which are standing at substantial
gains. We plan to keep our home for the time being while we arrange for
the disposal of the other properties, and will probably give the house
to our adult children. Will we be able to sell the properties without
paying any capital gains tax?
A:
You are liable to capital gains tax (CGT) on any chargeable gains if
you are resident in the UK. When you eventually dispose of the investment
properties, the timing of their disposal will be important in determining
whether you are liable to CGT.
If you are leaving the UK permanently, HM Revenue & Customs (HMRC)
can treat taxpayers as being non-UK resident from the date of departure.
However, this treatment is a concession, which will not apply in your
case because you were previously resident and ordinarily resident in the
UK. You would therefore need to delay the disposal of the properties for
CGT purposes at least until the tax year following your departure from
the UK.
Temporary non-residence
You intend leaving the UK permanently, but of course circumstances can
change. In addition to the above rules about residence, there is also
a tax rule regarding ‘temporary non-residents’, which prevents
persons from leaving the UK for a relatively short time, disposing of
their assets while non-UK resident free of CGT, and then returning to
the UK. In broad terms, if you leave the UK and subsequently return, you
are liable to CGT on gains made during your period of absence on the investment
properties owned prior to departure and sold during your stay abroad if:
- You were UK resident for at least four out of the last seven tax
years; and
- Your period of non-residence is less than five tax years.
If caught by this rule, property gains arising during the period of absence
would be taxable in the year that UK residence is resumed. However, gains
on other assets acquired abroad and disposed of during your years of non-residence
will normally be outside the charge, subject to certain anti-avoidance
rules.
With regard to your current home, the gift to your adult children is
deemed to take place at market value for CGT purposes. Even if you are
caught by the above ‘temporary non-residents’ rule, if the
gift is made within three years of vacating the property, any gain should
be covered by private residence relief (assuming that the house was otherwise
your only or main residence throughout the period of ownership), which
includes the last three years’ ownership whether you continue living
there or not.
The ’91 day’ rule
If HMRC are satisfied that someone has left the UK permanently (or at
least for three years or more) they will normally treat that individual
as not resident or ordinarily resident, providing that
- Absence from the UK has covered a whole tax year; and
- Return visits to the UK average less than 91 days per tax year (this
average is measured over a period of up to four years), excluding visits
for ‘exceptional circumstances’ such as illness.
The above ‘91 day’ rule is not an absolute limit. In other
words, HMRC may seek to treat you as ordinarily resident in the UK even
if you spend less than 91 days a year in the UK, if they consider it appropriate.
There is very little legislation on residence status, and practice in
this area has largely developed from case law. The Government is also
understood to be considering possible changes to the law and practice
on residence and domicile. Specific professional advice on attaining non-resident
status is recommended.
You do not state how many investment properties you own. It is arguable
that actively managing a number of investment properties constitutes a
‘business’. There are potential tax planning opportunities
involving incorporation (i.e. transferring the business to a limited company
as a going concern), if this status was accepted by the Revenue. However,
such issues are beyond the scope of this reply.
Further information on the tax implications of moving abroad is contained
in a useful booklet IR20 ‘Residents and non-residents: liability
to tax in the United Kingdom’, which can be accessed via the HMRC
website: http://www.hmrc.gov.uk/pdfs/ir20.htm
Finally, it should be noted that in moving abroad, whilst you may escape
taxes in the UK by becoming non-resident, you are likely to become liable
to tax on income and gains in your new country of residence. Local advice
should therefore be obtained.
Mark McLaughlin
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