|
|
|
Taking a break in your residence |
Imagine you own UK properties with substantial latent gains. You may
have acquired these properties piecemeal over the course of a number of
years, and drawn down on the equity to fund subsequent purchases.
Given the massive price increases in the value of most UK property, you
could be eager to sell some or all of these properties, but could be
severely put off by the potential capital gains tax ('CGT') charge
arising.
You've spoke to your partner and have decided to leave the UK, and sell
all the properties pocketing the proceeds free of UK tax.
Great - nice and easy - but what about oveseas tax? You'll need to find
an overseas country of residence that offers both no CGT, as well
as being somewhere you want to live.
A neat way to sidestep this is to arrange for a break in your residence
status so that you actually dispose of the UK properties whilst you are
in a tax haven. A common plan here would be to move to the US
permanently, but take a break in the Cayman Islands on the way.
What is crucial is to ensure that you cover all the fine points when
considering something like this. In particular you'll need to know
how long you have to be resident in the tax free haven to
be certain the gains have been washed out and that they
wont come back to bite you in your final destination. For example,
say you are looking to move to the US, you may want to get to your
final destination as soon as you can, but at the same time be
sure that the IRS won't want their piece of flesh
because you techincally disposed of the UK properties whilst US
resident.
There are three aspects to this. You will need to ensure
that you avoid UK CGT, avoid any US CGT and also avoid any taxes
in the country of residence (ie the intermediate country).
One option would be to simply travel for a tax year and
ensure that you were non resident in any country during the
tax year of disposal. This will need to be for the UK tax
year of disposal (ie 6 April to following 5 April) and the US tax
year of disposal (usually a calendar year).
Let's say you wanted to stay in Europe for twelve months and avoid
becoming classed as resident of any country. The first step would
be to look at the residence rules for the countries you're planning to
visit eg UK, Ireland and Cyprus. These are as follows:
UK
You will be regarded as resident in the UK during a tax year if :
· You spend 183 days or more in the UK during the tax year, or
· Although here for less than 183 days, you have
spent more than 90 days per year in the country over the past four
years (taken as an average). You will then be classed as UK resident
from the fifth year.
Ireland
You will be resident in Ireland for a tax year in either of the following circumstances:
If you spend 183 days or more in Ireland during a tax year or,
If you spend 280 days or more in Ireland over a period of two
consecutive tax years, you will be regarded as resident for the
second tax year.
Cyprus
You will be resident in Cyprus for tax purposes if 183 days or more per tax year are spent in Cyprus
Therefore providing you spent less than 90 days in the UK, less than
183 days in Cyprus and less than approximately 140 days in Ireland, you
should not be resident in any of the countries. You could therefore
dispose of any UK assets free of any tax charges (although you would
need to remain outside the UK at least five tax years).
Although there is nothing wrong with travelling it may make
it more difficult to establish non UK residence/ordinary
residence and may not in any case be suitable in terms of
lifestyle for you.
Of crucial importance will be establishing the fact that
you will be non UK resident and non UK
ordinarily resident.
As stated above, you will be regarded as resident in the UK during a tax year if :
· You spend 183 days or more in the UK during the tax year, or
· Although here for less than 183 days, you
have spent more than 90 days per year in the
country over the past four years (taken as an
average). You will then be classed as UK
resident from the fifth year.
When looking at the residence position for a tax year
an individual is not normally resident for part
of a tax year. However, where a person leaves the UK
to take up a "permanent" residence elsewhere he is
regarded as resident in the UK from 6 April to the
date of his departure and non resident for the period
that he is overseas.
Permanent in this case means for a period of at least
three years. You should complete a form
P85 on your departure from the UK, and this would be
used by the IR to provisionally assess your residence
position.
If you can show that your UK residence is sold or at least on
the market for sale, and that you have acquired
a home overseas, either as a purchase or lease this
would be highly persuasive evidence that you have left for
a permanent visit. For this reason any visas or leases
should be in excess three years whereever possible.
You should then be non UK resident and non UK ordinarily resident from the date of departure.
In terms of the US, a person who has been admitted as a
lawful permanent resident (i.e. a "green card" holder) can
be treated as a U.S. resident for the year in which
the "green card" is issued. This will continue until the
greencard is rescinded or abandoned. As a US
resident, you would be taxable on your worldwide income and
gains. However, you'd be looking to ensure you realised any gains
before becoming US resident.
You will be treated as a U.S. resident for tax purposes
beginning on the first day you are present in
the U.S. as a lawful permanent resident. As a
resident taxpayer you must report, for U.S. tax
purposes, your worldwide income.
However, if you become US resident during a tax year, part of the
tax year would have been spent overseas, either in the UK
or in another jurisdiction.
This is known as the dual status tax year and is of crucial importance if you want to take a break.
A dual-status year is one in which you change status between being non US resident and US resident.
As a dual-status taxpayer, you would be taxed on
income/gains from all sources for the part of the
year you were a US resident. Generally, you are taxed on
income/gains only from U.S. sources for the part of the
year you were a non US resident. (However, all income
that is considered to be effectively connected with the
conduct of a trade or business in the United States is taxable).
Note that income/gains you received from sources outside the US
while a non US resident is not taxable in most cases even if you
became a US resident after receiving it and before the close of the tax
year.
Therefore if you acquire residence via a green card, it would be
sufficient that you disposed of the UK properties prior to
actually becoming US resident, even if you became US resident mid way
through a tax year.
If you wanted to be more certain of the position you could dispose of
the properties during a tax year that you were both non UK and
non US resident, but were either resident in a tax haven
jurisdiction or simply travelling. Note that you would need to
ensure that you took account of the differing tax years for this
purpose.
There are a number of jurisdictions that offer a CGT free environment, including:
- The Channel islands
- Cyprus
- Isle of Man
- Caymans Islands
- Bahamas
- British Virgin Islands
Establishing tax residence in one of these jurisdictions is not of
central importance, and actually some of the Carribean tax havens do
not have a concept of tax residence, as there are no taxes
anyway. Rather you simply need to ensure that you don't
dispose whilst US or UK resident (and aren't for example classed
as a temporary emigrant).
If you have not stepped foot in the US, and disposed of the properties
whilst in the Caymans, even if the Cayman trip was only for a short
period, there is little prospect of the IRS seeking to charge US
taxes on the gain, particularly if the disposal was in the tax
year prior to US residence.
So taking a well earned break can be a useful option to avoid both UK
and overseas taxes if you're planning to move abroad but don't fancy
settling in one of the low/no tax countries.
As always take detailed advice relevant to your circumstances before considering any tax planning.
|
|
|
|
|
|
|
