Property uplift available for those who leave the UK
2nd September 2024
Posted in Articles, Budget, Capital Gains Tax by Michael Hodgson
After just over 50 days of a new Labour government, the early warning sirens are already ringing for many UK tax residents, with tax rises looking to be a sure thing in the 30 October Budget. Capital gains tax (‘CGT’) rates and landlords are both politically easy targets, and it would be no surprise if CGT rates go up and/or landlords are hit with further sanctions in October.
This has left many landlords running for cover and looking for ways to mitigate hefty CGT liabilities arising on their retirement. One option that they could consider is leaving the UK entirely and taking advantage of the non-resident capital gains tax regime. If they follow this strategy then they generally need to be non-resident for six tax years to avoid a gain being assessed on them when they return.
Non-resident Capital Gains Tax Regime (‘NRCGT’)
Since 6 April 2015 (for residential property) and 6 April 2019 (for commercial property) non-UK tax residents have been subject to UK capital gains tax on disposals of UK land. This legislation was introduced to ensure that UK tax was paid by non-resident individuals who realised capital gains from the UK property market.
Under the NRCGT regime the base cost of the property is treated as the market value of the property when the property becomes within the scope of UK CGT (i.e. either 6 April 2015 or 2019). It is therefore only the growth in value of the property from this date that is taxable in the UK.
Perhaps surprisingly, there are no restrictions preventing an existing UK tax resident from leaving the UK and taking advantage of these rules. This creates an opportunity for UK landlords to remove large historical gains from the scope of UK tax.
Example
Del has been a UK tax resident for his entire life. He owns an industrial unit in London which he acquired in December 2003 for £100,000. The property was worth £1.5m in April 2019 and is worth £2m today.
Del wishes to sell the property to fund his retirement. As a UK tax resident, he expects to realise a capital gain of £1.9m from the sale. At 20% CGT this results in a liability of £380,000 which Del is begrudgingly willing to pay. However, were CGT rates to increase to 45% (the top rate of income tax) as some have speculated, Del’s CGT liability would increase to £855,000. This is a step too far for Del and he is looking for ways to mitigate this liability.
One option that Del has is to move abroad and become non-UK tax resident. As a non-UK tax resident Del can benefit from the NRCGT regime, which means that any capital gain is based on the April 2019 value, even though he has owned the property since December 2003. These rules instantly reduce Del’s capital gain to £500,000 (£2m less £1.5m) with the pre April 2019 gain simply falling away. This results in a potential CGT liability of £225,000 for Del (if CGT rates are increased to 45%).
Forbes Dawson view
CGT rates of up to 45% would be some of the highest in Europe and you can expect many people to be running for the exit doors if the rumours are true. The above example results in a tax saving of £630,000 for Del which is worth a few years in the sun! This also supposes that the Budget does not include measures to clamp down on these kind of opportunities – which cannot be ruled out.
We are also aware of some landlords who incorporate their property businesses and then leave the UK. Any gain is initially deferred under section 162 incorporation relief and then, on a future disposal, the company can use a base cost which is equivalent to the market value of the property at the time of incorporation. After a sale of the properties there is no reason that the company cannot be liquidated without UK tax implications. Care needs to be taken here to ensure that the section 162 relief is not denied due to the tax avoidance motive of leaving the UK.
As a final point, and to state the obvious, any tax planning that involves leaving the UK needs to carefully consider the tax treatment of any destination where the individual will become tax resident. There are plenty of opportunities to jump out of the frying pan and into the fire here!
