My client is currently UK resident (i.e. for the tax year 2013/14) and he has been offered a job working for a company based in Dubai. He has been asked to start on 1 July 2014. I am keen to know whether he will be non-UK resident from 1 July 2014 or 6 April 2014, or whether he will remain resident in the UK for the whole of the tax year 2014/15. His wife holds 5,000 ordinary shares in a UK listed company, which have increased significantly in value. She will remain in the UK. If she transfers them to him, will he be able to avoid capital gains tax on their sale whilst he is working overseas?
As your client will be leaving the UK after 5 April 2013, his residence position will be determined under the new rules contained in the statutory residence test (SRT) introduced by FA 2013 ss 218, 219, Schs 45 and 46. (Note: all references below to ‘para’ are to those paras in Sch 45.)
Under the SRT, an individual is resident or not for the whole tax year (para 2(3)). However, the so-called ‘split-year’ treatment may be available for the tax year 2014/15. This would mean that your client is treated as UK resident for part of a tax year and non-UK resident for the other part (paras 43, 53 and 56); however, this requires that you satisfy one of two sets of conditions, referred to as cases 1 and 3 (paras 44 and 46). The first set of conditions requires that you start to work full-time overseas and the second set of conditions requires that you cease to have a home in the UK.
As your client’s wife will remain in the UK (i.e. resident), your client will retain a UK home and thus will not be able to meet the latter set of conditions referred to above. The term ‘home’ is defined in the SRT (para 25), but somewhat unsatisfactorily, as a building in relation to which an individual has arrangements with a degree of permanence, such that it will count as the individual’s home.
However, it is highly likely that he will be able to meet the former set of conditions.
Working overseas
Your client will become non-UK resident from 1 July 2014 under the full-time working overseas test if:
(1) he was UK resident for the tax year 2013/14;
(2) he is non-UK resident for the tax year 2015/16 because he satisfies (for that tax year) the third automatic overseas test (para 14); and
(3) he starts to work overseas in 2014/15 and that work continues to at least the end of 2014/15, and during this period (i.e. 1 July 2014 to 5 April 2015), he works sufficient hours overseas subject to restrictions with respect to working back in the UK and/or visiting the UK (para 44).
Condition (1): Your client satisfies this condition as he was UK resident for the tax year prior to 2014/15, i.e. the tax year 2013/14.
Condition (2): The third automatic overseas test requires a number of conditions to be satisfied for the tax year 2015/16. The conditions are that: he works for at least 35 hours per seven days over that tax year on average (para 14(3)); fewer than 31 days are worked in the UK (on which more than three hours’ work is carried out); and the total number of days spent in the UK is less than 91 days (a day is spent in the UK if you are in the UK at midnight; para 22(1)). These conditions should be capable of being easily satisfied; 90 days in the UK should be more than adequate for return visits (e.g. to see his family), although perhaps care needs to be exercised to ensure that the 30 days working in the UK restriction is not breached, particularly if the Swiss company has a UK subsidiary or UK office to which your client may be sent from time to time.
Condition (3): Your client will be starting to work overseas during 2014/15; in addition, provided he works on average for at least 35 hours per seven days during the period from 1 July 2014 to 5 April 2015, he will work sufficient hours overseas (paras 14(3) and 44(7)). However, any work done and general visits to the UK are restricted to a maximum of 22 days and 60 days respectively during this period (pro-rated from the 30 days and 90 days for a complete tax year; see condition (2) above). Condition (3) should therefore be capable of satisfaction, but note that return visits to the UK should be monitored carefully in the balance of this tax year.
Prima facie, it seems that your client should be able to qualify for split-year treatment for the tax year 2014/15, in which case, his non-UK residency will commence on 1 July 2014 (i.e. the first day on which he does more than three hours work overseas). This does assume, as stated above, that his job continues through to 5 April 2016 at the very least.
The share sale
Normally, no capital gains tax arises with respect to a disposal of an asset by a non-UK resident individual (as determined under the SRT). Prima facie, if your client sells the shares on or after 1 July 2014 (as a non-UK resident) no capital gains tax charge should thus arise.
However, under the temporary non-UK resident anti-avoidance provisions (TCGA 1992 s 10A), a capital gains tax charge will arise (deemed to arise in the tax year of return) unless your absence from the UK is for more than five years (not tax years) or more. Hence, a return to the UK on or before 30 June 2019 will result in a capital gains tax charge.
Assets acquired during a period of temporary non-UK residency (i.e. not owned prior to this period) normally fall outside the temporary non-UK residence anti-avoidance provisions and no capital gains tax charges arise on disposal. However, this let-out does not apply to, inter alia, assets acquired by way of an inter-spouse transfer during this period. So, even if the shares are transferred to your client from his wife after he has acquired non-UK residency (i.e. he acquires an asset during the temporary period of non-UK residency), the capital gains tax charge is not avoided.
