Leaving the UK to live overseas can present many planning opportunities but there are also circumstances in which individuals may find themselves in danger of paying more tax than necessary both while they are overseas and if they return to the UK.
Planning is especially important and the process should generally start well before leaving the UK. Some clients and advisers concentrate their attention exclusively on planning in terms of the UK tax authorities. In many case the local tax rules of the country they intend to live in are even more relevant. It is essential to obtain expert local advice and it is strongly advisable to consult someone whose knowledge extends to some understanding of the UK tax position as well. Moving overseas affects all areas of financial planning including but not limited to:
- Assets subject to Capital Gains Tax
- Assets subject to Income tax
- Investment portfolios
- State benefits
- Pension plans
- Private Residence
- Inheritance tax planning and Wills
This post considers some of the capital gains tax implications for people leaving the UK to live abroad. It is assumed that the person moving abroad is UK domiciled at the point of departure. If an individual is leaving the UK permanently or indefinitely they must tell HMRC by completing form P85((if not already required to complete a tax return). If HMRC is happy with the position, HMRC will treat them as non-UK resident from the date of departure.
Planning with assets subject to Capital Gains Tax (CGT)
The general rule is that a UK-domiciled person will only be subject to CGT on the sale (or a gift) of an asset in the UK, if they are resident or ordinarily resident in the UK. Therefore if the disposal of an asset can be delayed until a person is neither UK resident nor ordinarily resident, no CGT will arise at the time of disposal. In practice it would normally be recommended for a person to delay a disposal until the tax year following departure.
In addition the person must remain non-resident for 5 complete tax years. If this condition is not met, the capital gain will be taxed in the year of return to the UK. In this case, the CGT will be calculated based on the rules and rates in the year of return and only one annual exemption will be available.
For investments that have are carrying a loss, disposing of them before departure from the UK, allows the loss to be crystallised so that it can be used or carried forward.
Any assets that are both purchased and disposed of during the period of non-UK residence will not become subject to UK taxation regardless of whether there have been five tax year of non-residence. Therefore a person considering returning to the UK may benefit by disposing assets before taking up UK residence subject to the CGT rules of their overseas residence.
The exception to this rule was introduced on the 5th of April 2015 where residential property owned by non-UK resident individuals and their associated entities are subject to UK capital gains tax even it you have lived outside the UK for 5 years. Gains from the 6th of April 2015 are taxable so it advisable to obtain a property valuation for that date to avoid unnecessary complications on disposal in the future.
Before leaving the UK, it is important to check whether an individual’s switch to becoming non-UK resident/non-UK ordinarily resident will trigger previous CGT liabilities that they have deferred by the use of holdover relief. If you leave the UK within 6 years of receiving a gift that you elected to hold over the gains, a CGT charge could be triggered on the whole of the held over gains. There is an exception for people who have a full-time contract of employment outside the UK and who return to the UK within three years and have not disposed of the assets while they were overseas.There are similar provisions that claw back CGT reinvestment relief on investments in EIS shares.
In summary early planning and working with advisers that are familiar with the rules in both your overseas residence and the UK can help to minimise your potential capital gains tax liabilities on your investments.
Trinity Financial Management work with Expatriates to help them navigate the complex financial situation they find themselves in when they move abroad. Contact Frank on firstname.lastname@example.org to discuss your needs.
This article is provided on the strict understanding that it is for the reader’s general consideration only. Accordingly, no action must be taken or refrained from based on its contests alone.