Capital gains tax was rumoured to be facing a serious overhaul according to numerous news stories published ahead of the budget announcement from UK chancellor Rishi Sunak.
Instead, the Treasury has opted for a capital gains tax freeze while the chancellor and his team reprioritise other areas of the economy in his plans to rebalance the country’s finances in the wake of the Covid-19 crisis.
This is great news for those expats with assets in the UK who would have been likely watching the latest budget from the chancellor very closely. Their attention would have been drawn to any comments surrounding the capital gains tax rate, particularly as previous reports suggested it was set to rise in line with income tax rates.
Instead, the chancellor opted to freeze capital gains tax alongside the pensions lifetime allowance and inheritance tax until 2026. But how does expat capital gains tax work, what are the rates and what does this freeze mean for expats? Let’s take a closer look…
What is capital gains tax?
Capital gains tax is a levy on any financial profit made after the sale of an asset that has increased in value. Only the ‘gain’ is taxed, not the total amount of money you receive.
This gain figure is calculated by taking away the sale value from the original purchase value.
For example, if you bought a piece of art for £18,000, then sold it for £25,000 you gained £7,000 (£25,000 minus £18,000). So, you would pay tax on the £7,000 gain.
When do you pay capital gains tax?
If your gains fall under your tax-free allowance of £12,300, then there is no tax to pay. Following the budget, this threshold has remained the same. Couples can combine their allowances on any jointly owned assets to raise the threshold to £24,000.
However, there are several scenarios when you have to pay capital gains tax on chargeable assets. They are:
- The majority of personal possessions with a value of more than £6,000 excluding vehicles
- Your main home if you’ve used it for business, let it out or it is large in size
- Any business assets
- Shares not kept in an ISA or PEP.
You may be able to reduce the amount you pay by claiming tax relief.
How does capital gains tax apply to expats?
Capital gains tax for expats works differently than those living in the UK. For the most part, it depends on whether you are viewed as a UK resident or a non-UK resident.
However, just living abroad as an expat does not mean you automatically become a non-UK resident. HMRC now stipulates that individuals who spend a large amount of time overseas need to undertake a statutory residence test to work out their tax status.
If you live elsewhere, then you may also be liable for capital gains tax in your current country of residence. It is good financial sense to seek advice as both an expat and a local tax expert in your country of residence to work out what tax responsibilities you have to meet.
The rules surrounding expats and paying capital gains tax used to stipulate that if an individual left the UK for a tax year, then disposed of any assets during that year, then they could avoid paying this tax.
Now the law has changed so an individual has to be a non-resident for at least five years to take advantage of this rule.
What does non-residency mean as an expat?
Any individuals who start expat life abroad and cease being viewed as a UK resident by HMRC will not be charged on any gains made on assets after leaving the UK.
If their non-residency is deemed to be temporary, then they will need to pay capital gains tax. You will be temporarily non-resident if:
- You have been resident in the UK for at least four tax years (out of the seven tax years prior to departure)
- You then return to the UK after a period of non-residence lasting five years or less.
If you do not complete five years of non-residency, then you will be faced with capital gains tax in the year of your return. This will be worked out using the rules and rates in the year you come back.
Property gains as an expat
Expats have to pay tax on gains made on property and land in the UK even if they are non-resident for tax purposes. HMRC rules on capital gains tax were updated in 2015 and impacted any temporary non-resident expats who either had second homes in the UK or were buy-to-let landlords.
The new rules state that capital gains tax should now be reported and paid within 30 days of a sale taking place. While it is possible to be assessed for capital gains tax on the original value of the residential property, you may choose to have the gain assessed on the 5th April 2015 market value of the property if owned before this date.
The new charge generally only applies to the element of any gain arising which relates to the period from 6 April 2015 to the date of disposal.
What is the rate of capital gains tax for residential property?
In the UK, capital gains tax for residential property is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%.
For trustees and personal representatives of deceased persons, the rate is 28%. The rates are 10% and 20% for individuals with non-residential property and other assets.
What tax relief is available?
There are several forms of tax relief available. You do not pay capital gains tax on any assets you give or sell to your husband, wife or civil partner, unless:
- You separated and did not live together at all in that tax year
- You gave them goods for their business to sell on.
You also do not have to pay tax on assets you give away to charity. However, you may have to pay if you sell an asset to charity for both:
- More than you paid for it.
- Less than market value.
Other forms of relief include:
- Entrepreneurs’ relief: reduced rate of 10% on qualifying products
- Business incorporation relief: delay paying capital gains tax when transferring your business into a limited company
- Business asset rollover relief: delay paying capital gains tax when disposing of assets you will ultimately replace.
Changes from the UK budget 2021
Following the recent budget, the capital gains tax allowance will remain at £12,300per year for individuals until 2026. The good news for expats is that they won’t pay tax on any gains less than this current allowance.
However, many commentators mean gains are more likely to become taxable in the future. News stories have suggested that the chancellor will look to cut the annual tax-free allowance from current levels to £2,000. This has been called by some commentators as a potential deterrent against investing and saving but ultimately what happens post-Covid, is still to be decided as the economy begins to recover.
Choosing the best ways to invest your money to effectively prepare for the future can be a challenge. ExpatRoute is on hand to help provide you with the necessary information to invest effectively in your future regardless of the expat pension freeze. Contact a financial adviser today for tailored financial advice.