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13 December 2000
Better than the Lottery!
A client has an area of land acquired as part of his residence which he feels is worth some £2 million when planning permission is obtained shortly. He wishes to avoid all taxation and is prepared to go to any reasonable lengths to achieve this end. He has suggested retiring and leaving the United Kingdom for residence abroad.
Readers' input regarding tax exemption and/or mitigation would be much appreciated.
(Query T15,726) – Lotterix.
A client has an area of land acquired as part of his residence which he feels is worth some £2 million when planning permission is obtained shortly. He wishes to avoid all taxation and is prepared to go to any reasonable lengths to achieve this end. He has suggested retiring and leaving the United Kingdom for residence abroad.
Readers' input regarding tax exemption and/or mitigation would be much appreciated.
(Query T15,726) – Lotterix.
Better than the Lottery!
A client has an area of land acquired as part of his residence which he feels is worth some £2 million when planning permission is obtained shortly. He wishes to avoid all taxation and is prepared to go to any reasonable lengths to achieve this end. He has suggested retiring and leaving the United Kingdom for residence abroad.
Readers' input regarding tax exemption and/or mitigation would be much appreciated.
(Query T15,726) – Lotterix.
The classic tax planning idea in the past was to become non-resident for a complete tax year (perhaps by taking a job overseas) and to make capital gains while non-resident.
The rules changed in 1998 so that if one sells assets owned before one leaves the United Kingdom, one has to remain absent for at least five complete tax years to avoid United Kingdom capital gains tax. There is an alternative that can reduce this period of non-residence down to as little as just over one year.
To follow this plan, the individual would need to move to a country with which the United Kingdom has a favourable tax treaty. Tax treaties usually override domestic tax legislation such as the five-year rule, and will often provide that any capital gain will only be taxable in the country in which the individual is resident. Countries with which the United Kingdom has favourable treaties include Bangladesh, Belgium, Bulgaria, Czech Republic, Hungary, Iceland, Ivory Coast, Poland, Portugal, Romania, Spain, Sri Lanka, Switzerland, Tunisia, Uganda and Zimbabwe.
The plan involves leaving the United Kingdom for at least one complete United Kingdom tax year, working full-time overseas (this is required to guarantee that the United Kingdom Revenue view the individual as non-resident); and becoming resident in one of the relevant treaty countries. The sale of the land would then take place while the individual is abroad and would not be taxable in the United Kingdom.
Some basic cautions are required. Firstly, one would have to look at the treaty for the country chosen, since the wording will vary between treaties. Secondly, one should beware of countries such as Belgium where individuals who are in the country temporarily are regarded as non-permanent residents who would be taxable only on (in this case) Belgian source income. Finally, and most importantly, it is necessary to look at the local tax rates on capital gains in the country where the individual made the same gain taxable at the 55 per cent rate in Belgium!
Nonetheless, real savings can be made in, say, Spain (rate of 20 per cent), Iceland (rate of 10 per cent) or Switzerland where there is no tax on private capital gains. - D.M.T.
It is a pity that we do not know the area of land involved. If, exceptionally, it is less than one-half of a hectare it should be wholly exempt from capital gains tax under the provisions of section 222 et seq, Taxation of Chargeable Gains Act 1992 provided it is disposed of in advance of or at the same time as the residence itself. If it is of a greater area and is garden or grounds it may be possible for the client to argue that it is required for the reasonable enjoyment of the residence itself.
If the gain would otherwise be chargeable then to avoid capital gains tax the client needs to be not resident and not ordinarily resident in the United Kingdom in the tax year of disposal in view of the provisions of section 2, Taxation of Chargeable Gains Act 1992. An absence of at least five complete tax years is now required unless advantage can be taken of any particular double taxation agreement (see section 10A, Taxation of Chargeable Gains Act 1992.
We are told that the client wishes to avoid all taxation and the receipt of the proceeds will mean that his estate is worth very much more than the inheritance tax nil rate band. On the premise that the client is domiciled within the United Kingdom the scope of inheritance tax will apply to his worldwide estate. To avoid this liability he will need to acquire a domicile of choice in a territory outside the United Kingdom, which will require him to be physically present there and to have the intention permanently to remain there. He will also need to sever most of his connections with the United Kingdom.
Even if the client achieves a change of domicile, United Kingdom situs assets will remain liable to inheritance tax and he needs to be aware that most other countries impose some form of tax on the estates of deceased persons. If he really wants to avoid all taxation he will have to choose a 'tax haven'.
Under the deemed domiciled provisions in section 267, Inheritance Tax Act 1984, the client needs to be aware that he will remain United Kingdom domiciled for inheritance tax purposes for three years after his acquisition of a domicile of choice outside the United Kingdom. To guard against death within that period, he might invest in permitted gilts (sections 6(2) and 267 (2)). Lacuna.
A client has an area of land acquired as part of his residence which he feels is worth some £2 million when planning permission is obtained shortly. He wishes to avoid all taxation and is prepared to go to any reasonable lengths to achieve this end. He has suggested retiring and leaving the United Kingdom for residence abroad.
Readers' input regarding tax exemption and/or mitigation would be much appreciated.
(Query T15,726) – Lotterix.
The classic tax planning idea in the past was to become non-resident for a complete tax year (perhaps by taking a job overseas) and to make capital gains while non-resident.
The rules changed in 1998 so that if one sells assets owned before one leaves the United Kingdom, one has to remain absent for at least five complete tax years to avoid United Kingdom capital gains tax. There is an alternative that can reduce this period of non-residence down to as little as just over one year.
To follow this plan, the individual would need to move to a country with which the United Kingdom has a favourable tax treaty. Tax treaties usually override domestic tax legislation such as the five-year rule, and will often provide that any capital gain will only be taxable in the country in which the individual is resident. Countries with which the United Kingdom has favourable treaties include Bangladesh, Belgium, Bulgaria, Czech Republic, Hungary, Iceland, Ivory Coast, Poland, Portugal, Romania, Spain, Sri Lanka, Switzerland, Tunisia, Uganda and Zimbabwe.
The plan involves leaving the United Kingdom for at least one complete United Kingdom tax year, working full-time overseas (this is required to guarantee that the United Kingdom Revenue view the individual as non-resident); and becoming resident in one of the relevant treaty countries. The sale of the land would then take place while the individual is abroad and would not be taxable in the United Kingdom.
Some basic cautions are required. Firstly, one would have to look at the treaty for the country chosen, since the wording will vary between treaties. Secondly, one should beware of countries such as Belgium where individuals who are in the country temporarily are regarded as non-permanent residents who would be taxable only on (in this case) Belgian source income. Finally, and most importantly, it is necessary to look at the local tax rates on capital gains in the country where the individual made the same gain taxable at the 55 per cent rate in Belgium!
Nonetheless, real savings can be made in, say, Spain (rate of 20 per cent), Iceland (rate of 10 per cent) or Switzerland where there is no tax on private capital gains. - D.M.T.
It is a pity that we do not know the area of land involved. If, exceptionally, it is less than one-half of a hectare it should be wholly exempt from capital gains tax under the provisions of section 222 et seq, Taxation of Chargeable Gains Act 1992 provided it is disposed of in advance of or at the same time as the residence itself. If it is of a greater area and is garden or grounds it may be possible for the client to argue that it is required for the reasonable enjoyment of the residence itself.
If the gain would otherwise be chargeable then to avoid capital gains tax the client needs to be not resident and not ordinarily resident in the United Kingdom in the tax year of disposal in view of the provisions of section 2, Taxation of Chargeable Gains Act 1992. An absence of at least five complete tax years is now required unless advantage can be taken of any particular double taxation agreement (see section 10A, Taxation of Chargeable Gains Act 1992.
We are told that the client wishes to avoid all taxation and the receipt of the proceeds will mean that his estate is worth very much more than the inheritance tax nil rate band. On the premise that the client is domiciled within the United Kingdom the scope of inheritance tax will apply to his worldwide estate. To avoid this liability he will need to acquire a domicile of choice in a territory outside the United Kingdom, which will require him to be physically present there and to have the intention permanently to remain there. He will also need to sever most of his connections with the United Kingdom.
Even if the client achieves a change of domicile, United Kingdom situs assets will remain liable to inheritance tax and he needs to be aware that most other countries impose some form of tax on the estates of deceased persons. If he really wants to avoid all taxation he will have to choose a 'tax haven'.
Under the deemed domiciled provisions in section 267, Inheritance Tax Act 1984, the client needs to be aware that he will remain United Kingdom domiciled for inheritance tax purposes for three years after his acquisition of a domicile of choice outside the United Kingdom. To guard against death within that period, he might invest in permitted gilts (sections 6(2) and 267 (2)). Lacuna.
