REV BN 25: Chargeable Gains: Temporary Non-residents
Who is likely to be affected?
1. Individuals who:
- return to the UK having been temporarily neither resident nor ordinarily residentin the UK; or
- are resident or ordinarily resident in the UK but have been temporarily treated for tax treaty purposes as resident in a territory outside the UK.
General description of the measure
2. The measure will ensure that individuals are not able to exploit the terms of any Double Taxation Agreement (DTA) to secure that capital gains arising to them while they are temporarily outside the charge to UK tax escape being charged to capital gains tax (CGT) under the rules for temporary non-residents which were introduced by the Finance Act 1998.
Operative date
3. The measure has effect from today. The detailed commencement effects are described in paragraphs 14, 15 and 18 to 20 below.
Current law and proposed revisions
4. Section 2(1) of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that individuals are chargeable to CGT in respect of capital gains arising to them in any tax year during any part of which they are resident in the UK or during which they are ordinarily resident in the UK.
5. Section 10A TCGA provides that individuals who, throughout
a period encompassing fewer than five complete tax years,
are neither resident nor ordinarily resident in the UK may
be chargeable to CGT in the tax year of their return as though
all the capital gains and losses which arose to them during
the “intervening tax years” (that is, the tax
years between the tax year of departure and the tax year
of return) had instead arisen to them in the tax year of return.
Section 10A applies in relation to an individual only if certain
“residence requirements” are satisfied for each
of at least four of the seven tax years immediately preceding
the tax year of departure. An individual satisfies the residence
requirements for a tax year if he or she is resident in the
UK during any part of the year or ordinarily resident in the
UK
during the year.
6. In any case where section 10A has effect in relation to an individual and foreign tax has been paid in respect of any of the gains which are brought within the charge to CGT, an appropriate amount of relief from double taxation will be available in the UK or in the territory of temporary residence, in accordance with the normal rules.
7. Where individuals have realised gains during an intervening tax year, the Inland Revenue has accepted the view that their liability to CGT in their tax year of return in respect of those gains was subject to the terms of the DTA between the UK and the territory in which they were resident for tax purposes when the gains arose. Some individuals have sought to exploit this situation by disposing of assets when they are resident in a territory where no, or only a small, liability to tax will arise in respect of the gains in question on the basis that the terms of the relevant DTA prevent the UK from taxing the capital gains, so no charge to UK tax can arise under section 10A. 8. However, the Inland Revenue now considers that those DTAs do not preclude a tax charge under section 10A in these circumstances. The Government is therefore acting to provide certainty and put the matter beyond doubt by announcing this measure.
9. The new measure also remedies a weakness in the definition of the “residence requirements” in section 10A so that it will not be possible for an individual to avoid a charge to CGT under that provision by arranging to be resident for tax treaty purposes in a territory outside the UK while simultaneously being resident or ordinarily resident in the UK. In such a case, under the law as it stands at present, section 10A cannot have any effect in relation to capital gains realised during a temporary period of such “Treaty non-residence” because the individual has, as a matter of fact, not ceased to be resident or ordinarily resident in the UK.
Main changes
10. The main changes made by new measure will confirm the Revenue’s revised view of the law mentioned in paragraph 8 above and rectify the problems mentioned in paragraphs 7 and 9 above.
11. First, the measure will secure that nothing in the terms of any DTA can be read as having effect to prevent a tax charge arising under section 10A in respect of any chargeable gains which are treated by that provision as arising to any individual in his or her tax year of return. As explained in paragraph 6 above, relief is given in the usual way in respect of any foreign tax paid in respect of the gains.
12. Second, the measure will provide that, for the purposes
of determining whether an individual satisfies the residence
requirements for a tax year for the purposes of section 10A,
any time at which the individual is resident or ordinarily
resident in the UK but is also Treaty non-resident will be
treated as a time when he
or she is neither resident nor ordinarily resident in the
UK.
13. The provision described in paragraph 12 above will not,
however, have effect to postpone a charge to CGT in respect
of any chargeable gains which arise to the individual under
section 13 TCGA (which has effect to attribute gains arising
to offshore companies to UK-based participators in certain
cases) or any of sections 86, 87 and 89(2) TCGA (which have
effect to attribute gains of offshore trusts to UK based
settlors or beneficiaries in certain circumstances) in a tax
year which becomes an intervening tax year solely on account
of this change to the rules.
14. The provisions mentioned in paragraphs 11 and 12 above will have effect in any case where the tax year of departure is, or (on the assumption that the provision mentioned in paragraph 12 above had always had effect) would be, 2005 - 06 or a later year.
15. Those provisions will also have effect in any case where the tax year of departure is, or (on that assumption) would be, 2004-05 and there is a time in that year on or after today at which the individual concerned is resident or ordinarily resident in the UK and not Treaty non-resident.
16. For the purposes of this note, an individual is “Treaty non-resident” at any time at which there exist “double taxation relief arrangements” (as defined in section 288(1) TCGA) for the purposes of which he or she falls to be regarded as resident in a territory outside the UK.
Minor changes
17. The measure also makes some minor changes to the rules in section 10A which determine, in the case of a capital gain arising to an individual on the disposal of an asset in an intervening tax year, whether the gain is to be treated as arising to him or her in the tax year of return:
- the rule in subsection (3)(a) concerning the individual’s residence status at the time when he or she acquired the asset is to be modified so as to cater additionally for cases where, at that time, the individual was resident or ordinarily resident in the UK but Treaty non-resident;
- the meaning of “relevant disposal” in subsection (8) is to be modified to provide that a disposal of an asset is a relevant disposal if the person making the disposal acquired the asset at a time when that person was resident or ordinarily resident in the UK and was not Treaty non-resident; and
- the list of CGT “rollover relief” provisions in subsection (3)(d) is to be expanded to include reference to section 153(1)(b) TCGA, which is a provision that provides rollover relief on the replacement of business assets.
18. The provision mentioned in the first bullet in paragraph 17 above will have the same commencement effect as the provisions described in paragraphs 11 and 12 above.
19. The provision mentioned in the second bullet in paragraph 17 above will have effect for the purposes of determining whether a disposal of an asset is a relevant disposal in any case in which the person making the disposal acquired the asset on or after today.
20. The provision mentioned in the third bullet in paragraph 17 above will have effect in relation to relevant disposals made on or after today.
Further advice
21. If you have any questions about this change, please
contact your local Inland Revenue Enquiry Office: see the
Telephone Directory for details. Mark Abani on 020 7147 2765
or Mark Abani
will deal with more detailed enquiries. Information about
Budget measures is available on the Inland
Revenue
website.
