Reshma Johar points out when emigration can cause a nasty surprise for business asset hold-over relief purposes, which could leave a person out of pocket when leaving the UK.
The chargeable gain arising from the gift (or transfer at undervalue) of an asset is reduced by the amount of held-over gain (which could wipe out either part or the entire gain). The recipient (or ‘donee’) will acquire the transferred asset with the held-over gain set against the base cost.
A held over gain will generally come back into charge when the asset is either disposed of or when the donee emigrates within six years of acquiring the asset with the gift relief.
Bon voyage!
This will only arise where the donee ceases to be resident in the UK within six years after the end of tax year in which the asset was acquired by the donee. The donee will be liable to capital gains tax (CGT) on the held over gain immediately before ceasing to be UK tax resident. When calculating the liability, it will be necessary to factor in any part disposal of the asset, as this would trigger a clawback of part of the holdover gain.
A deferred gain coming back into charge is assessable on the donee. However, if HMRC have been unable to collect the CGT within 12 months of the due date of the liability, HMRC are able to pursue the donor instead. The donor will not be liable to pay CGT on the held over gain if it arises more than six years after the end of the tax year in which the relevant gift had been made.
Don’t forget the clawback exception…
The donee will not need to worry about the clawback if the reason for ceasing to be resident in the UK is to take up full-time employment abroad where all the duties are performed outside the UK. This is provided that the donee returns to the UK within three years and has not disposed of the asset during the period of non-residence. The donee will not be assessed on the clawback of the holdover any time before the three-year period has expired.
Advisers will need to be satisfied that the period of working overseas for employment is temporary. If it appears that the period of absence is likely to exceed three years, the donee would be chargeable to CGT immediately before ceasing to be UK tax resident.
Exceptions to the UK residence requirement
The non-resident capital gains tax (NRCGT) rules provide that non-residents will be liable to CGT on disposals of UK residential property from 6 April 2015. Since 6 April 2019, the NRCGT regime has been extended to include direct or indirect UK land disposals (residential and non-residential property).
The holdover relief rules in TCGA 1992, s 165 have enabled non-resident individual donors to be able to jointly claim gift holdover relief, provided that the individual donee is UK resident. Gift relief is extended (under TCGA 1992, s 167A) where the donor is UK resident and the donee is non-UK resident.
Gift relief will only apply to business assets, which include furnished holiday lettings.
Special election for interests in UK land
Since the holdover relief rules have been broadened to accommodate gains arising under the NRCGT regime, the clawback provision specifically on residency of a donee has had to be adapted. It is possible for the donee to elect not to pay CGT on the clawback triggered when ceasing to be resident in the UK within six years after the end of tax year in which the asset was acquired with the holdover gain. The election will only be available where the asset is an interest in UK land (as defined under TCGA 1992, s 1C).
The effect of the election is that the donee (or donor) will not face an immediate liability just before ceasing to being resident in the UK. Instead, any subsequent disposal will factor in the held-over gain as part of the CGT calculation on a subsequent disposal.
HMRC has confirmed that the election to postpone a clawback of the NRCGT gain will not trigger a requirement to file an NRCGT return.
Elections should be made on a self-assessment tax return. Whilst no election deadline has been provided within the provision, it is assumed that the same deadline that is provided for holdover will apply; four years after the end of the relevant tax year.
Practical tip
Advisers will need to keep a record of any joint holdover claims, the nature of the asset as well as any part disposals made since the donee has acquired the asset. When a holdover claim is clawed back and comes into charge, details of the gift and the nature of the event should be included within the white space of the CGT pages of the self-assessment tax return.
