Could your non-resident client be liable to UK capital gains tax?
With the CGT regime tightening for non-residents, ensure you have the latest advice for clients.
The capital gains tax (CGT) regime for non-residents has been noticeably tightened since 2015. An example of this is that leaving the UK for a period of time may have a tax cost which is not limited to residential property landlords. Disposals of shares, art collections or other assets during a period of absence from the UK may not fall outside of UK CGT charge, as might sometimes be assumed.
The two most likely scenarios when UK CGT may arise to a non-resident are a disposal of a residential buy-to-let property or a disposal being caught by temporary non-residency rules.
This article looks at the principle of temporary non-residence rules, affecting assets other than residential property. It also covers residential property gains which arose before the introduction of NRCGT April 2015 rules, for individuals who have been UK resident at some point and whose residency status changed.
The rules governing temporary non-residence were revised in 2013. Old or new rules should be now be applied to assess a non-resident’s tax position, depending on whether the year of departure from the UK was from 2013/14 onwards (new rules), or before 2013/14 (old rules).
New rules – year of departure after 2013/14
In general terms, someone who left the UK in tax year 2013/14 or after will be regarded as a temporary non-UK resident if in the period of seven years prior to departure they were UK sole resident (only resident in the UK and not anywhere else) for at least four years, and then became non-UK sole resident (for example left the UK) for up to five years (calculated as 60 months from the date the individual becomes non-resident, subject to residence points imposed by double tax treaties, if applicable).
If someone becomes non-resident as a result of the application of split year treatment, this is retained for temporary non-residence treatment – gains after becoming non-resident are taxed in the year of return.
Delaying the return to the UK, so that the period of non-residence extends beyond five years, may be an important tax planning point, meaning no capital gains tax on return.
It is necessary to stress that practical application of the definitions related to temporary non-residence given within FA 2013, Part 4, s110-111, may in some cases produce unexpected results, where the year of departure and period of return may not coincide with the tax year of departure and return, and the five year period of non-residence may not be the same as the period of absence from the UK.
Temporary non-residence does not apply to assets acquired after departure, except in limited circumstances (assets transferred between spouses on a no gain no loss basis, assets created by a settlement, or assets on gains relieved under the holdover or rollover relief).
The effect of temporary non-residence affects the individual in the year of return to the UK. If any chargeable assets they held at the point of departure are disposed during their period of non-residence, they will be subject to UK’s CGT on their return, at the rates in force in the year of return.
The same treatment applies to capital losses realised in the year of temporary non-residence. Losses are allowable in the year of return. This is a relaxation of the previous old regime, when capital losses were restricted (see below).
Interaction with foreign tax
Temporary residence provisions take priority over any exemptions from UK tax resulting from a double tax treaty. Any double tax relief is therefore available only as unilateral relief and HMRC offer technical advice on how to claim exemptions under DTR in these circumstances. More information can be found at CG99998 .
Who else is affected?
The temporary non-residence rules extend to entities other than individuals such as some non-UK resident companies and some non-resident settlements. A non-UK resident company is affected if it was a close company but for being non-resident and whose members are non-UK resident when the asset is disposed by the company (TCGA92/S13).
A gain realised by a non-resident company is chargeable on the individual member of that company in the year of return (example 1). Losses realised by a non-resident company are only allocated to members to the extent they can be relieved against any realised company capital gains. There is no carry forward of the unused part of the loss (example 2).
Mr Defoe has a 95% interest in Castaway Cruises Limited, a company resident in the Bahamas. He left the UK in June 2019 and is not resident in the UK in either 2020-21 or 2021-22. He resumes UK residence in August 2022. In December 2020 the company disposes of land in Florida and realises a gain. If Mr Defoe had always been resident in the UK, s13 would apply so that the chargeable gain accruing to the company would be computed as if it had been UK resident and 95% of that gain would be treated as accruing to Mr Defoe. The fact that Mr Defoe was not UK resident when the gain accrued to the company will not prevent part of the gain being attributed to him under s13 and charged in the period of his return by virtue of s10A, providing the other conditions necessary for s10A to apply are met.
Mrs Adams, who has lived in the UK all of her life, leaves the UK on 1 September 2018 to take up a four year contract of employment abroad. She resumes tax residence in the UK on 31 August 2022.
Mrs Adams has owned all the shares in a company resident in Jersey for many years. The company owns a portfolio of shares and a number of properties. During Mrs Adams’ period of temporary non-residence the company makes a number of disposals. Gains and losses accrue as follows:
3 May 2019 gain £20,000 (year of assessment 2019-20)
23 October 2019 loss £5,000 (year of assessment 2019-20)
14 July 2020 loss £10,000 (year of assessment 2020-21)
4 September 2021 gain £20,000 (year of assessment 2021-22).
Mrs Adams fulfils all of the conditions for s10A to apply (see CG26540). Under s10A(2) all the gains which would have been treated as accruing to Mrs Adams in the period of temporary non-residence years if she had been resident in those years are treated as accruing to her in the period of return. Losses are attributed to her, and s10A applies to them, to the extent that they may be set against gains attributed in the same residence period.
Mrs Adams is therefore chargeable in the period of return as follows:
net gains of £15,000 (gain £20,000 less loss £5,000) from 2019-20
a gain of £20,000 for 2021-22.
The total gains chargeable are therefore £35,000. The loss arising in 2020-21 is not allowable because no gains from that residence period (in this case a year) were attributed to her.
Old rules – year of departure before 2013-14
Returning individuals who left in 2012-13 or earlier and who were resident or ordinarily resident (per tax legislation in those years) for at least 4 out of 7 tax years immediately before departure are liable to UK CGT in the year of return, if absence did not exceed five complete tax years (not 60 months from the date the individual became non-resident, per new rules).
Gain in the year of return
Anna, who had always been UK resident, left the UK in January 2013 and returned in February 2018. In December 2015 she disposed of shares she held when she left.
Anna was non-resident for less than five complete tax years – 2013-14, 2014-15, 2015-16, 2016-17 (four tax years). She will be charged to UK CGT in the year of return 2017-18.
Gain in the intervening year (whilst overseas)
Tom, who had always been UK resident, left the UK in August 2012 and returned in September 2017. He realised chargeable gain in August 2014, during the year when he was overseas.
Tom was non-resident for less than five complete tax years: 2013-14, 2014-15, 2015-16, 2016-17. Tom will be liable to CGT in the year of return 2017-18.
If an individual was neither resident nor ordinarily resident in the UK in the 4 out of 7 years before departure, they are outside of temporary non-resident rules (ESC D2), but this concession does not apply to business assets or gains made by trustees and settlors in some circumstances.
Split year treatment is ignored for the purposes of assessing whether someone is treated as temporarily non-resident. Gains on worldwide assets realised in the non-resident part of the split year of departure are still taxed in the UK.
There is no carry forward of any unrelieved capital losses. Some tax planning points may arise to time the disposals of assets in the same tax year, to maximise loss relief.
Temporary non-residence vs deemed domicile for CGT
Someone deemed domicile as a result of new CGT rules introduced in 2017-18 is not taxed to CGT on those gains to which temporary non-residence rules applied.
Where the old temporary non-residence rules apply to year of return of 2017-18, or the new temporary residence rules starts before 8 July 2015, the deemed domicile rules for CGT (resident for 15 out of 20 years of residence) are ignored: there is no remittance basis charge and loss of personal allowance or annual exemption as a result of income tax remittance basis.
Net capital gain needs to be shown in box 17 of CGT supplementary pages.
To claim foreign tax relief, page F6 of Foreign supplementary pages needs to be submitted, in addition to GT supplementary pages.
Total relief to be claimed needs to be shown in box 39.
Details of foreign tax relief need to be given in the white space on page CG3.