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TaxationWeb by Jennifer Adams

This article explores ways of saving on CGT by the owner of the business emigrating and then selling.For some strange reason the taxman thinks that he is entitled to a share of the gains made on the sale of a business that he himself did not create! There are ways round this - usually via the use of family settlements but as Mark McLaughlin detailed in his "Arthur" case study, there is another route on offer: the owner of the business could emigrate and then sell.



It is normally a relatively simple matter to organise the timing of a future capital gain so that you satisfy the basic rule of no UK CGT being due on the disposal of assets made in a tax year throughout which you are non-resident in the UK (TCGA 1992 s2(1)). The exception to this rule is found in TCGA 1992 s10a in the situation where you leave the UK having been resident or ordinarily resident for any part of at least four of the previous seven tax Years and then return within five tax years (known as being “temporarily non-resident”). Until the five years limit is up you will still be liable to CGT on gains made whilst abroad on assets held before you left the UK. Such gains made will be taxed in the tax year that you resume UK residence. There is one saving grace in that there are no interest charging provisions.



A curiosity of the system of taxing gains on return to the UK is that losses are similarly treated. Hence losses incurred in later years can be used against gains made in earlier years - something that, in the normal course of events is not usually possible. This produces a planning possibility - if you have incurred a CGT liability after emigrating and unfortunately have to return due to unforeseen circumstances resulting in tax falling due, you could sell items at a loss before you return to mitigate the gain. You have to be careful as only losses incurred on assets held when the taxpayer went abroad can be used; any assets bought whilst abroad and then sold at a loss can not be used - this is an obvious restriction. An enforced return also means that all gains are taxed together but with only one annual exemption; all the annual exemptions in the intervening years being lost.



So if you decide that emigration is the route to take, where do you go? Emigration does not suit everyone - you may find yourself living in a country that is too hot for our fair British skin or living on an island where even receiving SKY television is impossible. Countries that are economically and politically stable must be paramount on the list and preferably have a lower cost of living than the UK. UK law is very generous in that it allows people to move their tax residence to any country in the world that they fancy moving to and still retain full British citizenship, passport and protection rights. The British Consulate has a list of those countries with which the UK has friendly relations (for some reason France is still on the list!) and hence can steer you away from any trouble spots. Places such as the Channel Islands must be an automatic consideration as the natives speak English, you can receive BBC television, drive on the left and buy clothes from Marks and Spencer. Panama, Luxembourg, Liechtenstein, Monaco, Andorra, Barbados and the Cayman Islands are also strong possibilities satisfying the requirement of being peaceful countries where many speak English and have designated shops for expats where you can buy British goods (e.g Marmite).



Also you preferably don't want to move to a country that has residency based CGT laws otherwise there is little point in emigrating! However, you may feel that you do not mind paying some CGT so long as it is at a lower rate that the UK rate; if you do have to pay a form of CGT in your chosen country of residence then you should be able to claim credit against the UK tax payable in the event that you unexpectedly return to the UK earlier than anticipated and be hit with a UK CGT bill. How much tax you will be liable to pay on your return will depend upon the terms contained in any Double Tax Treaty between your chosen country and the UK. If the Double Tax Treaty has no relevant provision (as in the case of the US treaty with the UK) then the fact that a taxpayer has paid tax in that country will not protect him from UK tax.



The old favourite places such as the Channel Islands and the Isle of Man are also not suitable to avoid UK tax via the Treaty method, as they also do not have appropriate treaties in place. In Bermuda, the Bahamas and the Cayman Islands there is no income tax, profit tax, capital gains tax, wealth tax or estate tax whereas in places such as the Netherlands, Australia or Canada (as we saw in Mark's article) a new resident has an uplifted base cost so that the only gain liable to their form of CGT is on the increase in value from the date of arrival to the date of disposal. Switzerland and Singapore do not tax Capital Gains. Hong Kong, Gibraltar and Malta only tax domestic source income.



Overall, moving your tax residency is an expensive business fraught with problems - we all know the pressure when we just move house within the UK but to move abroad entails not just hiring a removal van and diverting your post. Additional costs come in the form of payments for permits, the cost of setting up bank accounts and you will probably find that you are forced to pay more for your house than the locals as is the case in Guernsey, Jersey and Bermuda. You may also find that as a "foreigner" in order to comply with your chosen country's residency requirements you must generally own or rent a property in the country and spend at least 3 - 6 months of the year there. You may also be required to make some sort of financial investment or set up a business employing local people.



So the good news is that a change of residence need not be permanent and substantial tax savings can be gained by changing residence for even a limited period.