Capital Gains Tax Avoidance Restricted

The British Government are continuing their crack down on UK Capital Gains Tax avoidance and this year saw the introduction of one specific policy that restricts opportunities for those seeking to use temporary non-resident status to reduce or negate their UK CGT liability.

The measure was introduced in this year’s budget and came into effect on the 16th of March 2005.  It applies to anyone considering moving temporarily overseas or remaining UK resident but becoming a dual resident in a country with which the UK has a double taxation agreement in an attempt to avoid capital gains tax on assets disposed of in the UK.

There is a general rule that a UK resident who relocates overseas for a period of five years can avoid paying capital gains tax on UK owned assets sold within or following that period.  But this rule was potentially broken where a double taxation agreement was in effect between the UK and the country to which the UK resident relocated. 

The very nature of the double taxation agreement meant that the former UK resident now living in the country or a UK dual resident in the country with the double taxation agreement would become subject to the domestic taxation rules in that country. 

Therefore it was possible for a UK resident to move to a country like Belgium where there is no capital gains tax for example, reside there for only a year, dispose of UK held assets, profit from the disposal and pay no tax on their chargeable gains.

The UK Government were very unhappy with this loophole and sought to close it in this year’s budget, and according to their ruling anyone who seeks to become non-resident after March 16th 2005 will be affected by this change in legislation.

Since then there has been a great deal of argument between leading taxation advisers, lawyers and the government over the actual legality of this action.  It appears that by seeking to fundamentally change the very basis on which all worldwide double taxation treaties work the action is not enforceable or legal and it is fundamentally against both OECD practice and International Law.

As a result of the ongoing arguments it may be that this legislation is restructured or ruled illegal if challenged at EU or international levels, but currently it stands.

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