In recent years, many business owners have become increasingly concerned about rumoured increases in Capital Gains Tax (“CGT”) rates. These rumours have been accompanied by significant curtailments to Business Asset Disposal Relief (“BADR”, formerly Entrepreneurs’ Relief) in 2019 and 2020, and fuelled more recently by the need for the government to plug the gaping hole which the pandemic has left in the public finances.
In the build-up to the March 2020 Budget, we experienced a surge in business sales and exits accelerated by entrepreneurs and business owners looking to ‘bank’ the current rate of CGT and de-risk the value they have accumulated from being subject to higher rates of tax. Whilst the subjects of possible increases to CGT rates and the availability of BADR are still very much on many of our clients’ agendas, there is another option which we have been seeing an uptick in enquiries about. The prize? Paying no UK CGT at all. The catch? Leaving the UK for at least six years.
As a general rule, only UK residents are subject to CGT in the UK. Non-UK residents are outside of the scope of UK CGT even if the capital gains realised are on a disposal of UK-situs assets (though note there is an exception to this rule for UK land and property disposals).
In the past, many taxpayers took advantage of this by temporarily leaving the UK to crystallise capital gains outside of the UK CGT net, before returning to the UK shortly afterwards. HMRC cottoned on and introduced anti-avoidance provisions known as the temporary non-residence rules. Broadly speaking, under the temporary non-residence rules, if an individual crystallises a capital gain during a period of non-UK residence, they will be subject to UK CGT at the point they return if they stay outside of the UK for a period of five years or less.
Therefore, by leaving the UK and becoming non-UK resident for tax purposes for at least five years before returning, and selling a business during the period of non-residence, the taxpayer would be completely outside of the scope of UK CGT. From a practical perspective, residence is determined in the UK on a tax-year basis (i.e. 6 April to 5 April), and so it is prudent to plan to remain outside of the UK for six full years from the date of departure to ensure you are not caught by the anti-avoidance provisions.
There are a few other issues to consider. Firstly, where in the world to go? Each territory will have its own tax regime and rules, and there would be little point in undertaking such a massive personal upheaval only to end up being subject to similar, or potentially higher, tax rates in another territory. Some are more attractive than others from a tax perspective (Dubai and Portugal are particularly popular at the moment), but local advice is always essential in any cross-border activities involving tax.
Secondly, the ongoing tax residence position needs to be managed very carefully. UK residence is determined under the statutory residence test, which can be complex. UK residence can easily be accidentally triggered by returning to the UK for even a small number of days in a tax year, especially if the taxpayer retains ties to the UK, such as a home or family links. This would trigger the temporary non-residence rules and cause the gain to come into charge in the UK.
Finally, there are also non-tax considerations, and a decision on whether this is a viable option will usually come down to personal circumstances and lifestyle. Leaving the drab and dreary UK and waving a cheery goodbye to 2-mile tailbacks at the petrol station and empty supermarket shelves for the sunny shores of the Algarve or an apartment in the shadow of the Burj Khalifa sounds fabulous, but six years is a long time. Can you really uproot your children and put them into international school? What happens if one of your parents falls ill and needs care? It’s easy to underestimate the culture shock of moving to another country and severing many ties with life in the UK, and some people find it to be far easier said than done.
That being said, not everybody has these complications to take into account, and the chance to live abroad for at least six years might genuinely be attractive. A CGT-free gain on a sale of a business could be the cherry on the icing on the cake!
Claritas’ Private Client team regularly advises on all aspects of pre-departure (and pre-arrival) UK residence planning, including the application of the statutory residence test and the temporary non-residence rules. We also have strong links with international firms and can provide contacts in other territories if offshore tax advice is required.
