UK Capital Gains Tax Liabilities for Overseas Expats: When Might a Tax Obligation Arise?

Expatriates moving overseas often appreciate the importance of thorough, forward-thinking financial planning. That could involve purchasing property overseas, restructuring investment portfolios and pension funds, and managing income streams to ensure their finances are in good order.

Many clients also require advice around tax exposure, whether corporation and income tax, taxation on interest and dividend earnings, tax liabilities against pension benefits, or handling exposure to inheritance, wealth and property taxes.

An often overlooked factor is that, irrespective of where you live and whether you are a permanent overseas tax resident, you may remain liable to pay Capital Gains Tax against gains arising within the UK – let’s look at the scenarios in which this may happen, and how to manage your tax obligations as efficiently as possible.

When Does UK Capital Gains Tax Apply?

The basics of Capital Gains Tax (CGT) are that the tax applies to a financial gain – or profit – you make when selling, transferring or otherwise disposing of a capital asset, such as equity shares or real estate.

While rules vary considerably between countries, as do Capital Gains Tax rates, this tax is fairly universal, and most countries have some form of similar tax structure. HMRC in the UK applies CGT to a wide scope of assets, including:

• Profits made when selling assets, including inheritances.
• Assets and shares transferred following a divorce or civil partnership.
• Some gifted assets.
• All types of property sale that are not otherwise exempt.

There are four standard Capital Gains Tax rates: 24% against taxable gains on the sale of a residential property if the taxable gain is above the basic rate tax band or 18% for gains below this threshold. All other gains are taxed at 10% or 20% as a flat rate.

The higher 20% rate applies to any chargeable gain after deducting allowable losses or expenses that remains above the basic tax rate.

There is a Capital Gains Tax allowance, which has dropped progressively since the 2022/23 tax year. At that point, the allowance was £12,300 but fell to £6,000 from 2023/24 and again to £3,000 from the start of the 2024/25 tax period.

While various exemptions may come into play, and the sale of a primary residential home is normally exempt, the key is to ensure you know which transactions will likely generate a CGT liability and, importantly, how much the tax charge will be.

Capital Gains Tax Charges for Non-UK Residents

There is often confusion around the impact of being a tax resident or non-resident in one country or another. In short, a tax resident is normally primarily taxable in that country and is subject to taxation against all their worldwide assets and income.

However, this doesn’t mean that assets held in another country or earnings originating elsewhere are automatically excluded from the domestic taxation scheme. Instead, the standard treatment is to declare the earnings or income in the country of origin and offset the tax paid in one country against the charge arising in the other.

One of the most frequent CGT taxable events for British expats resident elsewhere is the sale of a property. Many people retain property as a rental asset or as part of a long-term investment portfolio to ensure they have somewhere to live if they decide to return or gift to a child or other family member.

The rules mean that if you sell a property, regardless of whether you have a CGT liability and where you live, you must report the transaction to HMRC, even if the property was, or is currently, your main residence.

Those returns must be made within 60 days for non-residents, and non-compliance can result in a fine, whether or not a CGT obligation arose.

Your tax liability also depends on when you purchased a UK property. Changes to tax rules in 2019 mean that non-residents are no longer outside the scope of CGT and may be liable to pay some or all of the resulting charge.

Understanding the Amount of a Gain Subject to UK Capital Gains Tax as a Non-Resident

The specifics can become complex, and it is well worth consulting an experienced wealth manager or tax specialist who can advise on the application of CGT to your asset sale or transfer.

CGT was reformed at the start of the 2015 and 2019 tax years. If you have a chargeable gain on a property sale and purchased the property before either change, you may be liable to pay a percentage of CGT based only on the gain since the date of purchase. In short, you may be liable to pay partial CGT if you have a taxable gain arising on a property you purchased before 6^th April 2016 or before the same date in 2019.

Most non-residents can still claim the annual exemption, currently £3,000, and may be entitled to some private residence relief if the property sold was a main home. The excess will then potentially be exposed to CGT or non-resident CGT, and you may be able to choose how the gain is calculated for tax purposes. This can be done by:

• Working out the amount of gain that arose between the date of the purchase and the date of the sale – you will need an official valuation as of 1^st April 2015 or 2019 for this to be accepted.
• Calculating the full gain and apportioning it over the entire period of ownership. The amount of the gain allocated to the time since CGT was subsequently reformed is then taxable.

From there, you will normally need to submit a self-assessment tax return or a separate declaration and pay the relevant tax. That documentation will then be required when filing a subsequent tax return in your country of residence, assuming a double tax treaty exists, to avoid paying duplicate tax on the same gain.

Capital Gains Tax for Non-Residents Returning to the UK

A further complication arises for expats returning to the UK after being temporarily non-resident. While tax residency assessments can become involved, you are normally deemed a temporary non-resident if:

• You were a UK tax resident for four or more of the last seven tax years before you relocated and
• You relocated from the UK and were a non-UK resident, and
• You returned to the UK after a non-residence period lasting no more than five years.

In this scenario, you may be liable to pay CGT on all gains realised when you were a non-resident, including those related to periods where you were a resident for part of the time and a non-resident for the remainder.

The principal is that HMRC doesn’t wish for UK residents to relocate over the short term to avoid tax liabilities, so returning to the UK will normally mean you need to pay CGT against any gains that occurred in the interim. If you’ve also paid taxes overseas for the same gain, you may be able to claim double tax relief.

UK Capital Gains Tax can become very complex, and a lot depends on the type of asset sold or disposed of, your tax residency position before and after the transaction, and the value of the taxable gain.

If you need more assistance calculating your Capital Gains Tax liabilities or evaluating whether a sale or transfer will generate a tax obligation in the UK, you are welcome to contact your nearest Chase Buchanan team.

*Information correct as at June 2024