90 Day Rule
A typical tax strategy for many expats who owned assets like buy to let or commercial property, stocks and shares while living in the UK would be to leave the country for a straight tax year, then sell the assets without paying any UK capital gains tax and then meet the 90-day rule to ensure the taxman could not chase any money.
In simple terms, the rule was based around the 90 days an expat is allowed to stay in the UK during the course of a tax year without becoming resident for tax.
Recent court cases have come down in favour of HM Revenue and Customs, who argued that the capital gains tax exemption only applies to non-residents, and to become non-resident means more than just complying with the 90-day rule.
In each case, judges have reiterated that non-resident means severing all ties with the UK and establishing new ones in the country where you live, not leaving a foot in both camps.
The cases are:
? Robert Gaines-Cooper
This high profile case was in the courts last month. Mr Gaines-Cooper left the UK in 1976 to live in the Seychelles and has claimed non-residence since then, but the courts found he had not severed ties with the UK as he maintained a home and had other connections. HMRC are claiming an estimated £30 million in unpaid tax and penalties.
? Lyle Grace
Mr Grace is a South African who worked as a pilot for British Airways and owned a house in the UK where he stayed over on his trips. The courts found despite him having a home in South Africa, his UK based job and home satisfied residency rules for tax purposes.
Sources claim the taxman has set up a special team to chase 5,000 high-net-worth individuals who claim non-residence while HMRC considers they still live in the UK and should pay tax here.
While these high-profile wealthy business people are in the spotlight, thousands more taxpayers who moved abroad are also in HMRC’s sights.
What Does Making a Clean Break Mean?
Leaving the UK for a new life abroad means just that. Anyone who has left the country but still has connections, like ownership of residential property, utility bills in their name, a mobile phone or credit cards from a UK lender are casting doubt on whether they have left all.
This even covers small ties like having a UK doctor or dentist. Letting property in this country while living abroad is OK – but that property must not be available for the expat to stay in on visits. Expats should also file a Form P85 on leaving the UK to tell the taxman they are non-resident.
The clear message from the courts is that the taxman can look at an expat’s entire life for evidence they still have solid ties with this country, not just the 90 days spent in the UK.
What Happens if the Taxman Thinks Someone is Not Non-resident?
If someone is considered to be UK resident and not non-resident, then tax is due in the UK on all that person’s capital gains regardless of when they left the country. In addition, the taxman can also pile on penalties, interest and surcharges for failing to pay the tax.
If you own assets and are about to sell them, check your tax residence status with an adviser with a view to breaking any remaining connections with the UK as soon as possible and certainly before disposing of the assets.
If you have already moved overseas and disposed of assets, then you must consult an adviser who can confirm tax residence at the time and whether the risk of paying tax is likely.