Conversation between a residential property investor and David Anderson, Tax Solicitor at Sykes Anderson LLP Solicitors and David Southern, Tax Barrister at 3 Temple Gardens Tax Chambers regarding Capital Gains Tax on his portfolio - 20th October 2003.
The information in this article is a general guide only. It does not constitute advice. You should not act or refrain from acting in any particular matter without seeking professional advice on the particular facts and circumstances of your transaction.
David Anderson is a specialist tax solicitor and Chartered Tax Advisor at Sykes Anderson LLP and can be contacted on 020 3178 3770 or david.anderson@sykesanderson.com.
David Southern is a tax barrister and can be contacted on 0207 353 7884 or clerks@taxcounsel.co.uk
Q. I am an investor and own in my name a number of tenanted residential properties, which will trigger a charge to Capital Gains Tax (“CGT”) if I sell or give them away. Is there a way I can get round this problem?
A. One way is for you to go non-resident for tax purposes. You will have to leave the UK for an entire tax year to start with. In other words to be non resident for CGT purposes you will have to leave the UK before say 5th April 2004 and be away until 6th April 2005.
Q. If I did this and sold or gifted the properties while I was abroad will I avoid CGT?
A. Yes but only if you stay non-resident for 5 full tax years. This means that the earliest you could return to the UK is 6th April 2010.
Q. What happens if I come back before 6th April 2010?
A. You will be liable to UK CGT on the gain in the tax year of your return.
Q. How often can I come back as a visitor to the UK?
A. If you become a non-resident of the UK you will be treated as remaining resident and ordinarily resident if your visits to the UK average 91 days or more per tax year.
Q. How do I manage my portfolio in the meantime?
A. You will have to appoint an agent.
Q. Can I shorten this period by going to a country with a suitable double tax treaty with the UK, which shortens this 5-year period?
A. Yes. If you become a permanent resident there and the double tax treaty contains suitable CGT provisions. Double Tax Treaties override UK tax laws.
Q. Can I stay in the UK whilst I deal with the sale of the properties and deal with extracting the cash tax-free by going abroad later?
A. Yes. You will need to transfer the properties to a company. The capital gains liability will then relate to the shares in the company not to the properties. The company will be able to sell them free of any liability for gains arising before the date of transfer to the company.
Q. If I bought a property for £100,000 and it is now worth £250,000 the company could sell it for £250,000 free of tax?
A. Yes. But your shares will be deemed to have cost you £100,000 and will be worth £250,000 which means if you sell the shares you will have a gain of £150,000. The sale of the property by the company will not trigger any CGT liability provided that £250,000 was the market value at the date of transfer. There will also be cash left in the company which will need to be extracted.
Q. What does transferring my properties to a company involve?
A. The company pays for the properties by issuing shares. You will need to sign a conveyance putting them into the company and stamp duty will be payable on the value of the shares. You may need to refinance the properties though this depends on your mortgage lenders criteria.
Q. Do I pay CGT when I transfer them to the company?
A. Not if you are running the property portfolio as a business and do not intend to sell the business at the time of the transfer. It is advisable for this transaction to be dealt with by a professional advisor.
Q. Where would this company be resident for tax purposes?
A. The company can be UK resident or offshore. It is best to keep matters as simple as possible. If you are controlling the company then it will be resident wherever you are resident. To make it non-resident you will have to become non-resident.
Q. How do I get the cash out of the company after I have sold the properties?
A. So long as the Company remains UK resident, money would have to be extracted by dividends. If the company changes residence (from UK to non-UK) post-transfer capital gains will be triggered. If the company is at the start established as a non-resident company. And you also become non-resident, the company could sell properties and you could dispose of your shares or wind up the company while non-resident free of UK tax. As explained earlier, it will be essential to determine how long you need to remain non-resident
Q. What if I remain UK resident but the company is non-resident?
A. If you remain UK resident, but the company is registered abroad and controlled by persons resident outside the UK, then, depending on the terms of the Double Tax Treaty which the country in which the company has with the UK, the company may be able to realise gains which are not attributed to you. Belgium is a country with a suitable double tax treaty. Spain may also be used.
Q. Will I need to get tax advice about the position in other countries involved?
A. Yes, or you might find that you had escaped UK tax only to run into another country’s taxes.
Q. What if I am non-UK domiciled?
A. There are other advantages available to you if you have a non-domiciled status, or could obtain such status agreed by the Inland Revenue.
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