UK property owners are bracing for potential tax hikes in the upcoming 30 October Budget. With capital gains tax (CGT) rates and landlord regulations being prime targets for adjustment, many are exploring strategies to protect their investments. One intriguing option gaining traction is the consideration of leaving the UK to take advantage of the non-resident capital gains tax (NRCGT) regime.
The NRCGT Regime
Introduced in April 2015 for residential property and extended to commercial property in April 2019, the NRCGT regime subjects non-UK tax residents to UK capital gains tax on disposals of UK land. While originally designed to ensure fair taxation of non-residents benefiting from the UK property market, it has an unexpected silver lining for current UK residents considering a move abroad.
Under this regime, the taxable gain is calculated based on the property’s value when it falls within the scope of UK CGT (either April 2015 or 2019), not the original purchase price. This creates a potential opportunity for long-term property owners to significantly reduce their tax liability.
A Case Study: Clarkson’s Dilemma
Consider the case of Clarkson, a lifelong UK resident who owns an industrial unit in Chadlington:
- Purchased in 2003 for £150,000
- Valued at £2 million in April 2019
- Current value: £2.5 million
As a UK resident, Clarkson faces a potential CGT bill of £470,000 at the current 20% rate. However, if CGT rates increase to 45% as some speculate, his liability could skyrocket to £1,057,500.
By moving abroad and becoming a non-UK tax resident, Clarkson could take advantage of the NRCGT regime. This would reset his property’s base cost to its April 2019 value (£2 million), resulting in a taxable gain of only £500,000. Even with a hypothetical 45% CGT rate, Clarkson’s tax liability would be £225,000 – a saving of £832,500 compared to staying in the UK.
Considerations and Cautions
While the potential tax savings are significant, there are several factors to consider:
- Duration of non-residency: To avoid reassessment upon return, individuals generally need to remain non-resident for six tax years.
- Destination tax implications: It’s crucial to understand the tax treatment in your new country of residence to avoid unforeseen liabilities.
- Potential legislative changes: The upcoming Budget could introduce measures to close this loophole, making swift action potentially necessary.
- Alternative strategies: Some landlords are exploring options like incorporating their property businesses before leaving the UK, potentially deferring gains under section 162 incorporation relief.
The Bottom Line
If you own valuable property in the UK and are open to living abroad, this could save you a lot of money. It’s especially worth thinking about if you’re near retirement age.
As always, it’s essential to consult with qualified tax professionals to ensure any strategy aligns with your specific circumstances and the latest regulations. The world of international taxation is complex, and what seems like a golden opportunity could have hidden pitfalls if not navigated carefully.
Disclaimer: This blog is accurate as of the publication date and is intended for general informational purposes only. It does not constitute legal or professional advice. Please seek independent professional advice.