Part 4 of 4
This is the Finance Act 2014 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in the period 1 April 2015 to 30 June 2016. Candidates sitting Paper P6 (UK) after 30 June 2016 should refer to the Finance Act 2015 version of this article (to be published in 2016).
So far we have looked at the income tax aspects of overseas income in some detail. In this final part of the article we are going to look at CGT and IHT.
The key factor in determining an individual’s liability to UK CGT is residence. Domicile is only relevant where a UK resident individual has realised gains on the disposal of overseas assets. Figure 4 sets out the liability of an individual to UK CGT on both UK and overseas assets.
Figure 4 – Liability to UK CGT
Note the following:
The rules for temporary non-residents were introduced in order to prevent individuals avoiding UK CGT by going abroad for a relatively short period of time, becoming non- resident and then selling assets outside the scope of UK CGT. The rules apply to individuals:
Gains made on assets owned at the time of leaving the UK, but sold whilst the individual is outside of the UK, remain subject to UK CGT. Gains on assets purchased after leaving the UK are not subject to UK CGT.
Bosun has always been UK resident and domiciled. On 1 June 2013 he left the UK and became non-resident. His intention was to remain outside of the UK for four years. In 2015/16 Bosun sold some shares (acquired in 2007), and a painting (acquired in 2015).
Bosun’s liability to UK CGT following his departure from the UK is as follows:
The key factor in determining an individual’s liability to UK IHT on overseas assets is domicile. Overseas assets are subject to UK IHT where the individual is either domiciled or deemed domiciled in the UK.
An individual who has come to the UK will become UK domiciled:
An individual who has left the UK will cease to be UK domiciled:
The deemed domicile rules relate to IHT only and are not relevant for the purposes of IT or CGT. The rules can apply to individuals coming to, and leaving, the UK.
An individual who comes to the UK with the intention of returning, in due course, to their home country is likely to retain a non-UK domicile. This is true even where the individual remains in the UK for a considerable period of time. However, once the individual has been resident for 17 out of the last 20 tax years, they are deemed domiciled for the purpose of UK IHT. As a result, any overseas assets become subject to UK IHT even though the individual has not acquired true UK domicile.
An individual who leaves the UK and acquires a non-UK domicile is still deemed domiciled in the UK for a further three years. Accordingly, any overseas assets continue to be subject to UK IHT until the individual has been non-domiciled for more than three years.
An individual who is liable to UK IT on worldwide income may find that income arising in respect of overseas assets is taxable in two countries – the UK, and the country in which the income arises. A similar situation may arise in respect of CGT or IHT. Relief may be available via either a double tax treaty or double tax relief.
A double tax treaty, between the UK and the country in which the income arises, will set out how double taxation is to be avoided or minimised. The treaty could state that the income will only be taxed in one of the countries concerned (for example, the country in which the income arises). Alternatively, it could impose a maximum rate of tax in one of the countries.
UK double tax relief is available where there is no treaty or where an element of double taxation occurs, despite the existence of a treaty. Overseas tax suffered, up to a maximum of the UK tax on the overseas income (or transaction, subject to CGT or IHT), is deducted from the UK tax liability.
International travellers add an extra dimension to exam questions because their liability to UK taxes changes as they move to, or from, the UK. When answering a question that includes an international traveller:
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.