As the UK anticipates the next budget announcement under a Labour government, one of the most closely watched aspects is the potential introduction of a new capital gains tax (CGT) rate, and the proposed changes to the IHT regime (to move away from domicile, and towards a residence based qualification). While specific details remain speculative, there is significant concern among high-net-worth individuals and investors about the possibility of higher UK CGT rates where no exemptions are available or are limited. There are also rumours of changes to business property relief or its withdrawal altogether.
This has led to increased interest in alternative jurisdictions that offer more favourable tax regimes.
The lifestyle in Gibraltar is a big draw. With its favorable climate, English-speaking environment, and strong legal and financial systems aligned with UK standards, Gibraltar offers a familiar and secure environment for UK expatriates. If a treaty between the UK and the EU in respect of Gibraltar can be closed (it is still being negotiated), then there will in addition be significant benefits for British citizens that want easy access to the Schengen area without the formalities of the new Entry Exit System and the related ETIAS.
Gibraltar is a particularly attractive option due to its lack of capital gains tax, its familiarity to UK residents and the ease in which British passport holders can relocate there and navigate the formalities. This means that individuals who establish residency in Gibraltar can dispose of assets without the burden of CGT that would apply if they were still UK residents. Furthermore, Gibraltar also offers other tax advantages, including no inheritance tax (although IHT will probably continue to apply to UK domiciled persons and/or UK situs assets within the IHT net), no wealth tax, and a capped income tax rate under certain residency schemes. Further, many forms of income that would be taxable in the hands of a UK tax resident, are not taxable in the hands of a Gibraltar resident.
Gibraltar offers a compelling case for those looking to mitigate the impact of potential tax changes in the UK.
Immigration to Gibraltar: Current Option
There are several methods to establish residency in Gibraltar under the Immigration, Asylum and Refugee Act and related legislation:-
1. Category 2 Individual
- Eligibility: Available to high-net-worth individuals.
- Requirements:
- Must have a minimum net worth of £2 million.
- Must purchase or rent a qualifying residential property in Gibraltar.
- Cannot engage in a trade, business, or employment in Gibraltar, although directorships or ownership of businesses outside Gibraltar are allowed.
- Must not have been resident in Gibraltar in the last three years before the application.
- Tax Benefits:
- Tax on worldwide income is capped at £44,740 per annum (unless a trade, business, profession or vocation or employment is undertaken in Gibraltar).
- Only the first £118,000 of worldwide income is taxable.
2. High Executive Possessing Specialist Skills (HEPSS)
- Eligibility: Designed for senior executives with specialist skills earning a minimum annual salary.
- Requirements:
- Must earn a minimum salary of £160,000 per annum.
- Must possess skills not readily available in Gibraltar which are deemed necessary to Gibraltar’s economic development.
- Must have a qualifying residential property in Gibraltar.
- Must not have been resident in Gibraltar in the last three years before the application.
- Tax Benefits:
- Only the first £160,000 of income is taxable in Gibraltar, which results in a maximum tax liability of £43,140 (on the HEPSS income – some other limited forms of income e.g. income from letting Gibraltar real estate would still be subject to Gibraltar tax).
3. Residence for employed or Self Employed persons (British and EEA citizens)
- Eligibility: Available to individuals who work in Gibraltar or who retire here.
- Requirements:
- Must either be employed or self-employed in Gibraltar, or provide evidence of retirement.
- Must have suitable accommodation in Gibraltar.
- Taxation: Residents are taxed on income earned in Gibraltar. The tax rate is progressive, depending on income levels.
4.Self-Sufficiency Residency (British and EEA citizens)
- Eligibility: Individuals who can support themselves without the need to work in Gibraltar.
- Requirements:
- Must demonstrate sufficient financial resources to support themselves and their dependents.
- Must have adequate health insurance.
- Must purchase or rent a suitable property in Gibraltar.
- Current Status: While it is legally possible to apply for self-sufficiency residency, the processing of such applications appears to be paused currently, possibly awaiting the outcome of the proposed treaty between the EU and the UK concerning Gibraltar's post-Brexit status.
Where the person relocating wishes to continue their career, Cornwalls Lane are well experienced in creating structures to allow relocation under the employment or self employment categories if the Category 2 status is not suitable or HEPSS is not relevant.
Leaving the UK - Split Year Treatment: Ensuring Compliance
For individuals planning to leave the UK before the end of 2024, understanding and properly utilizing the split year treatment is crucial for managing their tax obligations. Split year treatment can significantly reduce a person's exposure to UK taxes (in particular, capital gains tax on the disposal of an asset) by dividing the tax year into two distinct periods: a UK resident period and a non-resident period. This treatment is particularly advantageous for those who become non-resident partway through a tax year, allowing them to be taxed as a non-resident for the portion of the year that they spend abroad, rather than for the entire tax year.
Special rules apply to UK real estate and this is further compounded by the rules surrounding principal private residence relief.
Qualifying for Split Year Treatment
To qualify for split year treatment, individuals must meet specific criteria outlined by HMRC. The treatment is not automatic and depends on meeting certain conditions related to your circumstances when leaving the UK. There are eight cases (five of which are not relevant to leavers) under which an individual may qualify for split year treatment, categorized broadly into:
- Work full-time abroad.
- Join a partner or spouse who is working full-time abroad.
- Cease to have a UK home.
1. Working Full-Time Abroad: If you leave the UK to work full-time abroad, you can qualify for split year treatment if you meet all the following conditions:
- You become non-resident and satisfy the overseas work criteria during a relevant period, specifically working sufficient hours abroad (an average of 35 hours per week with no significant breaks).
- You spend fewer than the requisite number of days in the UK during the non-resident part of the tax year. The requisite number will depend on the day you leave and your working hours whilst abroad and reduces as your departure date gets closer to 5 April at the end of the tax year.
- You work in the UK for no more 3 hours a day on more than the permitted limit of days during the relevant period (which again depends upon when you leave the UK to start work abroad).
2. Joining a Partner Working Abroad: If your partner or spouse is working full-time abroad and you move to join them, you can also qualify for split year treatment. However, you must not have spent more than the permitted number of days in the UK during the non-resident period (which depends upon the date you leave), and you must establish a home in the same country where your partner is working.
3. Ceasing to Have a UK Home: This category applies if you leave the UK and no longer have a home in the UK, establishing your only home abroad. To qualify under this condition, you must:
- Have no UK home from the point of your departure.
- Spend fewer than 16 days in the UK in the part of the year after your departure.
- Have only home, or all of their homes, if they have more than 1, in that country within 6 months
A property does not need to be owned (or even a building, e.g. it could be a houseboat etc.) to be a “home”. In contrast, ownership of a property does not necessarily mean that a home is available – for example where the individual lets it out, or has it marketed for sale. The key thing to consider is how easy it is for the individual to occupy it quickly with a degree of permanence or stability. The legislation also states that something used only periodically, e.g. a holiday home will not count as a “home”. Each case will need to be assessed on its merits. Note that letting out your UK home will have a future impact on the availability of principal private residence relief (and hence likely lead to some CGT on the disposal of the old family home). The time of disposal for CGT is the time of entering into the contract, and the self assessment filing deadlines are different for residents and non-residents, so careful advice is needed in this area.
Managing UK Visits and Day Counts
Even after qualifying for split year treatment, it is crucial to carefully manage your visits to the UK during the non-resident part of the year. Exceeding the relevant limit could compromise your non-resident status, leading to unexpected tax liabilities.
Moreover, it's important to note that even when split year treatment applies, any UK-source income, such as rental income from UK property, remains taxable in the UK, regardless of your non-resident status. Therefore, it’s essential to have a clear understanding of what income remains within the UK tax net and to plan accordingly.
Planning and Documentation
Proper documentation and planning are vital to ensure compliance with split year rules. This includes keeping detailed records of your days in and out of the UK, proof of establishing a home abroad, and evidence of full-time work abroad (if applicable). It is advisable to consult with a tax advisor to ensure that all conditions are met and to avoid pitfalls that could jeopardize your non-resident status or result in unexpected tax liabilities.
For those considering leaving the UK, the split year treatment can provide significant tax benefits, but it requires careful planning and adherence to HMRC rules. For detailed information on how to qualify and maintain compliance, refer to the official HMRC guidance on split year treatment here.
Understanding the UK 5-Year Absence Rule on Capital Gains Tax
For individuals considering relocating from the UK to a jurisdiction like Gibraltar, it is crucial to be aware of the UK’s rules regarding temporary non-residents and capital gains tax (CGT). According to HMRC’s guidelines, the Temporary Non-Resident rules can have significant implications for those who are non-resident for a short period but plan to return to the UK.
Under these rules, if an individual disposes of an asset while they are temporarily non-resident, and they subsequently return to the UK within five full tax years, any gains realized during their period of non-residence may be treated as taxable in the UK. This means that such gains could be brought back into the UK tax net and assessed in the tax year when the individual returns to the UK.
Key Aspects of the 5-Year Rule
- Definition of Temporary Non-Resident: An individual is considered a temporary non-resident if they were UK resident for at least four out of the seven tax years preceding their departure and return to the UK within five years of leaving. The key point is that this rule targets those who leave the UK for a short period but maintain substantial ties to the UK, intending to return within this timeframe.
- Impact on Capital Gains: If an individual qualifies as a temporary non-resident, any capital gains made during their period of non-residence are treated as arising in the tax year of their return to the UK. This effectively means that the gains could be subject to UK CGT as if the sale occurred while the individual was a UK resident.
- Exceptions and Exemptions: Certain exceptions apply, particularly for gains on assets that are considered exempt (such as a primary residence, in some cases). However, these rules are complex, and specific advice should be sought to ensure compliance and understanding of how these exceptions might apply.
- Practical Considerations: To avoid the implications of this rule, an individual planning to relocate and dispose of assets might consider remaining non-resident for more than five full tax years. This ensures that any gains made during this period are not subject to UK CGT upon their return.
For detailed guidance, you can refer to the official HMRC help sheet on temporary non-residents and capital gains tax here.
By understanding and planning around the 5-year absence rule, individuals can better manage their tax obligations and make informed decisions about their residency and asset disposition strategies when moving to a favourable tax jurisdiction like Gibraltar.
Understanding the UK Statutory Residence Test
The UK Statutory Residence Test (SRT) is the primary tool used to determine an individual’s UK residency status for tax purposes. The SRT is based on a combination of factors, including the number of days spent in the UK, connections to the UK (such as family, work, and accommodation), and whether the individual has a "sufficient ties" to the UK.
The SRT has three main tests: the automatic non-residence test, the automatic residence test, and the sufficient ties test. For instance, if an individual spends fewer than 16 days in the UK during a tax year, they are automatically considered non-resident (it can be 46 days if non-resident in the preceding 3 tax years, or 91 days if you work full time abroad). Conversely, spending 183 days or more in the UK typically results in automatic residency. If neither of these conditions is met, the sufficient ties test will determine residency based on factors like having UK based family or a UK home.
For those planning to move to Gibraltar, it is crucial to understand these tests to ensure they do not inadvertently maintain UK residency, which would negate the benefits of relocating. The full guidance on the UK Statutory Residence Test can be accessed here.
Conclusion
As the UK government considers changes to capital gains tax rates, relocating to a jurisdiction like Gibraltar, which offers no capital gains tax, presents a highly attractive option for those looking to safeguard their wealth and realise a gain after the UK CGT changes. However, understanding the nuances of UK tax law, including the 5-year absence rule, split year treatment, and the statutory residence test, is crucial to ensuring that the move is both tax-efficient and compliant.
