International aspects of personal taxation (for Advanced Taxation - United Kingdom (ATX-UK) (P6))

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Part 4 of 4

This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.

So far we have looked at the income tax (IT) aspects of overseas income in some detail. In this final part of the article we are going to look at capital gains tax (CGT) and inheritance tax (IHT).

Liability to UK CGT

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

int-travellers-5


Note the following:

  • To be outside of UK CGT, an individual must be non-UK resident and must not be a temporary non-resident.
  • UK CGT applies to worldwide assets. Once an individual is subject to UK CGT it is then necessary to consider the person’s domicile status to determine the treatment of gains on overseas assets.
  • The rules set out in Part 2 of this article in respect of the remittance basis apply to chargeable gains as well as to income. Note that the de minimis limit of £2,000 applies to the total of unremitted income and gains.
  • An individual who is non-UK resident is subject to UK CGT on:
    —  UK assets used in a trade based in the UK, and
    — residential property situated in the UK
    but not on any other assets.


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:

  • who have been UK resident for at least four of the seven tax years prior to the year of departure, and
  • who leave the UK for a period of five years or less.


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.

Example 2 – Bosun
Bosun has always been UK resident and domiciled. On 1 June 2016 he left the UK and became non-resident. His intention was to remain outside of the UK for four years. In 2018/19 Bosun sold some shares (acquired in 2010), and a painting (acquired in 2018).

Bosun’s liability to UK CGT following his departure from the UK is as follows:

  • Bosun is not resident in the UK. Accordingly, he will not be subject to UK CGT unless he is caught by the rules for temporary non-residents.
  • If Bosun returns to the UK as planned he will have been outside the UK for less than five years and will therefore be a temporary non-resident. The gain on the shares will be taxed in the year he returns.
  • If he is non-resident for more than five years, the gain on the shares will not be subject to UK CGT.
  • The gain on the painting will not be subject to UK CGT regardless of when Bosun returns to the UK because it was acquired after Bosun left the UK.

Liability to UK IHT on overseas assets

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:

  • if all links with the former country of domicile have been cut, and
  • the individual intends to remain in the UK permanently.


An individual who has left the UK will cease to be UK domiciled:

  • if all links with the UK have been cut, and
  • the individual intends to remain in the new country permanently.


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.

Double tax relief and treaties

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.

Conclusion

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:

  • Be specific and precise in your terminology.
  • Be careful to address only those issues asked for in the requirement.
  • Ensure that you are always clear as to which tax you are writing about.


Written by a member of the ATX-UK (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 authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.

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