From April 2017 an individual who is a Long Term Resident (LTR) will become deemed UK domiciled for all UK tax purposes. A LTR is defined as someone who has been a UK resident in 15 of the last 20 years. Without the protection of the remittance basis this means LTRs will now be subject to Capital Gains Tax (CGT) on disposals of non-UK assets. This is a major change for non UK domiciled individuals who may have owned assets for many years. However, the impact will be lessened because rebasing is being offered. This transitional relief permits foreign assets to automatically be treated as if they had been disposed of and reacquired at their market value at 5 April 2017, meaning that only the rise in value beyond 5 April 2017 will be subject to CGT. The relief is subject to conditions which need to be born in mind.
Our previous article ‘The good news part 1: Capital Gains Tax (CGT) rebasing’ in December 2016 covered the key conditions of rebasing based on draft legislation at the time. The legislation was finally enacted in November 2017, followed by HMRC guidance in February 2018. We now take a fresh look at the relief, especially as the end of the tax year approaches.
Who qualifies for Rebasing?
Only an individual who is a LTR on 6 April 2017 will qualify. The government has decided not to extend rebasing to individuals who become LTRs after this date. Furthermore, individuals who were born in the UK with a UK domicile of origin Formerly Domiciled Resident (FDRs) are specifically excluded.
Crucially, the individual must not only be a LTR but also domiciled outside the UK under general law in each of the tax years up to and including the tax year of disposal. For LTRs who have been resident in the UK for most of their life, advice on domicile status should be sought in order to check the position before steps are taken to maximise the rebasing opportunity. HMRC are increasingly enquiring into the foreign domicile status of such individuals and preparing ahead is advisable.
Remittance Basis Charge 2017/18
The LTR must have paid the Remittance Basis Charge (RBC) at least once. Individuals who have been filing on the worldwide arising basis since 2008 may therefore wish to consider claiming the remittance basis for the tax year ended 5 April 2017 (or possibly earlier) if the RBC is less than the additional CGT that would be payable without rebasing. Any claim would need to be made within the permitted timeframe. We can help with this.
Very importantly rebasing is not available to trustees or companies.
The April 2017 rebasing provides valuable relief from CGT, but there are pitfalls as highlighted and planning points which I will try to illustrate using the following headings and some examples.
Conditions on moveable assets
The asset must be personally held on 5 April 2017 and disposed of after that date. It must not have been situated in the UK between 16 March 2016 (or acquisition if later) and 5 April 2017. For details of certain exemptions, please see our previous article, ‘The good news part 1: Capital Gains Tax (CGT) rebasing’
Klaus moved to the UK from Germany in April 2002. He will be UK deemed domiciled from 6 April 2017 as an LTR. He paid the remittance basis charge for the year ended 5 April 2017.
In 2008, Klaus acquired artwork worth £500k for his German property. Klaus imported the artwork for his London home in 2014. In June 2016, he decided that it was better suited to his German property and returned it.
In May 2018, Klaus sold the artwork for £800k. It was worth £750k in April 2017.
The asset was situated in the UK between 16 March 2016 and 5 April 2017 so is disqualified from rebasing. It does not meet any of the exemptions for assets brought to the UK for public access or repairs. Neither is it a personal use asset. Klaus will pay UK CGT on the gain of £300k.
Assets transferred between spouses are deemed to take place at no gain/loss for CGT purposes but can potentially qualify for rebasing.
In 2000 Carlo acquired a property in Rome for £3m. On 5 April 2017 it is worth £5m. Carlo transferred a 50% share to his wife in 2003. The disposal is at no gain/loss so their base cost is £1.5m each. The couple sell the property in April 2018 when it is worth £6m. Both are LTRs.
Without rebasing, CGT is due on a gain of £3m (£6m-£3m) or £1.5m each. With rebasing this falls to £1m (£6m-£5m) or £500k each.
The gain may be taxable in Italy and local advice should be sought. A claim for double tax relief may be appropriate.
The timing of spousal gifts can be crucial and Inheritance Tax (IHT) implications must also be considered carefully before gifts are made between spouses with differing domicile statuses.
John is UK domiciled and purchases shares in a Spanish company in 2014. He transfers these to his foreign domiciled wife Maria in March 2017. The spousal no gain/no loss provisions apply for CGT although only part of the gift is exempt for IHT due to the limited exemption which is available for transfers to a non-UK domiciled spouse. Maria is a LTR who has previously claimed the remittance basis and paid the RBC. She becomes deemed domiciled on 6 April 2017 and sells the Spanish shares in December 2017. Maria is entitled to rebasing upon her disposal.
If John had transferred the shares to Maria two months later in May 2017 the spousal no gain/no loss provisions would still have applied for CGT but Maria would not have met the conditions for rebasing upon the later sale because she did not own the shares on 5 April 2017. The gift would however have been fully exempt for IHT.
Indirectly held assets
Assets held under nominee or bare trust arrangements or in a transparent ownership vehicle such as a partnership or LLP will also qualify.
HMRC have confirmed that units held personally in an offshore non-reporting fund that may give rise to Offshore Income Gains (OIGs) will also qualify even though they are subject to Income Tax.
As a brief reminder, losses arising to foreign domiciliaries on non-UK assets are not allowable unless an election is made within the required timeframe following a claim for the remittance basis. The election provides for foreign loss relief based on strict ordering rules.
Once an individual becomes deemed domiciled, losses on subsequent disposals of worldwide assets are allowable without restriction.
If an individual ceases to be UK deemed domiciled by remaining non-UK resident for six complete tax years, they will be treated as a new arriver and may make a foreign loss election once more.
Opting out of Rebasing
Rebasing applies on an asset by asset basis and can be disapplied if a claim is made within the specified timeframe. This will be helpful in cases where the asset was standing at a loss on 5 April 2017 compared to its base cost. The election is irrevocable.
Bruce bought shares in an Australian company in 2012 for £300k. They are worth £275k in April 2017 but dropped to £250k in March 2018 when Bruce sold them. He is a deemed domiciled LTR and qualifies for rebasing.
Bruce’s loss without rebasing would be £50k (£250k-£300k). With rebasing the loss is £25k (£275k-£250k). Bruce should opt out of rebasing to maximise loss relief.
Temporary Non-Residents (TNR) CGT
Individuals who become non-UK resident but return to the UK within a five year period are subject to TNR rules, see our recent article ‘returning to the UK tax charges on overseas property’. There is transitional relief for individuals who left the UK before 8 July 2015 and fall within the TNR rules after realising foreign gains, and become deemed UK domiciled on arrival. They may claim the remittance basis on those gains in the year of their return to the UK, without paying the RBC.
Pierre left the UK in April 2015 to study in France and returned to the UK April 2019.
Pierre is deemed UK domiciled from April 2019 as a LTR but is considered TNR for tax years ending April 2016, 2017, 2018 and 2019. In 2017 he made gains on the sale of US listed shares. The proceeds of the disposal remain in his US bank account.
Pierre may claim the remittance basis in 2019/20 to shelter this gain. He will not be required to pay the RBC.
Interaction with mixed fund cleansing
The mixed fund cleansing provisions discussed earlier in this edition can be used to remit the clean capital trapped in the disposal proceeds of a foreign asset that has been subject to 2017 rebasing.
Nikola acquired £300k of Greek listed shares in April 2010. The market value on 5 April 2017 is £500k and on sale in March 2018 is £600k. The acquisition was made with clean capital and foreign income and gains subject to the remittance basis.
April 2017 rebasing applies. The proceeds of £600k will consist of three distinct layers:
Capital gain post April 2017 – £100K (£600K-£500K) – taxable on the arising basis, so this can be remitted to the UK without further tax consequence.
Capital gain to April 2017- £200K (£500k-£300k)- exempt, so clean capital; and
Base cost – £300k – mixed funds so potentially taxable if remitted.
Nikola can remit 1) and 2) to the UK by making a direct transfer to a UK account.
Nikola may remit the clean capital portion of 3) if she takes advantage of the cleansing provisions first (see earlier article). Otherwise she should keep the funds offshore.
Given the fact relief is so valuable we advise that foreign assets are reviewed and April 2017 valuations sought to see if rebasing will be beneficial. Valuations may be more difficult to obtain as time passes.
The relief is particularly important if you need to dispose of assets acquired with mixed funds and wish to remit disposal proceeds to the UK tax efficiently using cleansing provisions. The deadline for cleansing is 5 April 2019, so the clock is ticking.
There is no single solution that works for everyone and we recommend early action to maximise the benefit of this and other reliefs.
If you wish to discuss anything in this article, please get in touch with Pavandip Singh Dhillon or your usual Mercer & Hole contact.