ATXP6 UK
Syllabus A2. Chargeable gains A2b. The scope of CGT

A2bii/iii. Residence, Domicile and Deemed Domicile for CGT

Syllabus A2bii/iii)

Identify the concepts of residence, domicile and deemed domicile and determine their relevance to capital gains tax
and
Advise on the availability of the remittance basis to non-UK domiciled individuals

What is UK CGT paid on?

UK Residence

Capital gains tax implications

An individual’s residence status must be determined because, if they are UK resident – they will pay UK capital gains tax on their worldwide gains, but if they are not, they will only pay UK capital gains tax on their UK situated residential property.

Illustration – UK resident

John is UK resident and has capital gains of assets situated in the UK of £60,000 and an overseas gain from the sale of a villa in Spain of £10,000. 

How much UK capital gains tax will he pay? 

He is a higher rate tax payer.

  • Solution

    UK gains£60,000
    Overseas gains £10,000
    Total gains £70,000
    Less:
    A.E. (£11,700)
    Taxable Income £58,300

    £58,300 * 20% = £11,660

    UK capital gains tax payable £11,660

Non-UK resident

Normally, UK CGT is payable by UK residents. 

However, there is an exception to this for non UK residents selling UK residential property after 05/04/2015. 

The gain arising on the sale of the UK residential property will be taxable. 

There are 2 methods that can be used to calculate the gain – (the method which produces the lower gain should be used).

  1. Normal method:

    Sale proceeds - Less MV at 05/04/2015 = Taxable Gain

  2. Straight line method:

    Sale proceeds – cost = capital gain 

    Gain* (number of months of ownership after 05/04/2015 / total number of months of ownership)

    = Capital gain

Illustration:

Jake was not UK resident in 05/04/19 but sold a residential property for £300,000 during the tax year. 

He originally purchased it for £150,000 on 05/04/14 and at 05/04/15 it had a market value of £200,000.

What capital gain will arise on this sale?

Solution:

  • Normal method:
     
    Sale proceeds £300,000
    Less MV at 05/04/15 (£200,000)
    Capital gain £100,000

  • Straight line method:

    Sale proceeds £300,000
    Less cost (£150,000)
    Gain £150,000

    £150,0000 * 48 months/60 months = £120,000 is the capital gain

  • Therefore, the NORMAL method should be chosen to calculate the capital gain.

Domicile

An individual’s domicile is usually the country in which they have their permanent home. 

An individual acquires a domicile of origin at birth, which is the permanent home of the father.

Individuals retain this domicile until they acquire a different domicile, either through dependency if under 16 and their father changes his domicile, or by severing ties with the old country and acquiring a domicile of choice.

Deemed Domicile

An individual may be deemed domicile if they are not domicile under general law but they satisfy either one of two conditions.

First condition, which is relevant to formerly UK domiciled residents, is that the individual will be deemed domicile if the individual:

Was born in the UK; and
Has a UK domicile of origin; and
Is UK resident in the relevant tax year.

Second condition, which is relevant to long-term UK residents, is that the individual will be deemed domicile if they have been resident in the UK for 15 of the 20 years immediately preceding the relevant tax year.

Illustration – Deemed UK domiciled first condition

Clare was born in the UK and her father was domiciled in the UK until he and the family moved to New Zealand when Clare was 10 years old. Her father became domiciled in New Zealand and so Clare acquired a domicile of dependency in New Zealand. Clare is UK resident in the tax year 2018/19.

Will Clare be deemed UK domiciled in the UK in 2018/19?

Solution

Clare will be deemed UK domiciled in the UK in the tax year 2018/19 because she satisfies all three parts of the first condition.

Illustration – Deemed domicile second condition

Tom was born in Australia, his father had a UK domicile and so Tom had a UK domicile of origin. Tom moved to the UK in 2011/12 and became UK resident in that tax year.

Will Tom be deemed UK domiciled in 2018/19.

Solution

No. Tom only satisfies 2 of the 3 parts of condition one and he does not satisfy condition two as he has not been UK resident for 15 years.

UK Resident but not UK Domiciled/Deemed Domiciled

If an individual is UK resident but not UK Domiciled/Deemed Domiciled, there are 2 options for taxing income that arises overseas (Overseas gain).

  • Remittance Basis – whatever overseas income/gain exists, you only pay UK capital gains tax on the amount of income that you send back to the UK.

  • Arising Basis – whatever overseas income/gain exists, UK capital gains tax is paid on it entirely.

Illustration – Remittance basis

John is UK resident and has capital gains of assets (not residential property) situated in the UK of £60,000 and an overseas gain from the sale of a villa in Spain of £10,000. 

He sends £3,000 of the rental income back to the UK. 

He is a higher rate tax payer.

How much UK capital gains tax will he pay If he chooses the remittance basis?

  • Solution

    UK gain £60,000
    Overseas gain £3,000
    Total income £63,000
    Less:
    A.E. (£nil) - remember that the AE is not available to taxpayers using the remittance basis

    Taxable Gains £63,000

    £34,500 * 20% = £6,900

    (£63,000 - £34,500) * 40% = £11,400

    UK Income tax payable £18,300

Illustration – Arising basis (same details as the previous scenario)

John is UK resident and has capital gains of assets (not residential property) situated in the UK of £60,000 and an overseas gain from the sale of a villa in Spain of £10,000. 

He sends £3,000 of the rental income back to the UK. 

He is a higher rate tax payer.

How much UK capital gains tax will he pay If he chooses the arising basis?

  • Solution

    UK Gain £60,000
    Overseas gain £10,000
    Total income £70,000
    Less:
    A.E. (£11,700)
    Taxable Income £58,300

    £34,500 * 20% = £6,900
    
(£58,500 - £34,500) * 40% = £9,600

    UK Income tax payable £16,500

  • Conclusion

    Right now, the Remittance basis looks more attractive as only £12,600 tax is paid as opposed to £11,740 with the arising basis, but there are expensive consequences of choosing the remittance basis once the taxpayer has been in the UK for more than 7 years.  Also remember that the taxpayers loses their AE if they choose the remittance basis.  Careful calculations need to be performed each year to decide which basis to use.

Consequences of choosing the remittance basis

  • Unremitted income

  • Remittance Basis Charge

  • No annual exemption available for capital gains tax.

Remittance Basis Charge

If prior to the current tax year a person has been UK resident for at least 7 tax years then by making the remittance basis election they must pay HMRC a remittance basis charge. 

This is similar to paying tax on their unremitted income, except that it’s just a flat charge.

  • Prior to the current tax year the person was UK resident for at least 7 out of the last 9 tax years 
    RBC £30,000

  • Prior to the current tax year the person was UK resident for at least 12 out of the last 14 tax years
    RBC £60,000

Illustration

Kailash is domiciled in India. 

He has been UK resident since 01/04/2011 and earns a salary of £125,000 p.a.

He realises chargeable gains every year equal to his annual exempt amount.

He sold a property in India for £200,000 and realised a chargeable gain of £70,000.

He has emitted £20,000 of the gain back to the UK.

Which is more beneficial for him, the remittance or arising basis in 2018/19?

  • Solution

    Remittance basis

    UK resident 06/04/2011-5/4/2019 = 8 tax years

    R.B.C £30,000

    Capital gains tax computation:

    Capital gain = £20,000 * 20% = £4,000 + £30,000 = £34,000 (no AE available)

  • Arising basis

    Capital gain £70,000 * 20% = £14,000

    Conclusion
    He should choose the arising basis as this saves him (£34,000 - £14,000) = £20,000.