There is a lot going for the UK's taxing regime (as noted above re QAHCs), but we were reminded recently of an area where the UK leaves quite a lot to be desired and that is in the area of capital gains for newly arrived residents.

Unlike some countries, notably Canada and in certain circumstances the Netherlands, when a person arrives in the UK (whether it is a company or an individual) their assets all retain their original acquisition costs. There is no "step up" to the current market value. The UK considers that it is entitled to tax all of the gain, even where it arose with no economic linkage to the UK (i.e., before the person was resident in the UK).

This might be considered acceptable if there was no exit charge upon assets when a person leaves the UK (i.e., you are taxed here upon gains crystallised whilst in the UK, but we have no interest in gains crystallised outside the UK). However, there is an exit charge for companies and trusts, plus a potential exit charge for temporary non-residents if they dispose of assets whilst non-resident but return within 5 years of leaving. As an aside, we consider (well, some of us do!) that the temporary non-resident rules have a legitimate policy aim, as do exit charges, if they seek to secure UK taxation of gains made using the UK's economy. What we are against, however, is the attempt by the UK to obtain a windfall by taxing gains that have nothing to do with the UK.

Like many aspects of the UK's capital gains rules, we suspect that the reason for the lack of a step up is simply the perceived difficulty in valuing assets at the date of arrival in the UK. However, with advances in technology such valuations are now easier to come by (or make), but with the state of the UK's finances and the call for capital gains to be taxed at ever higher rates, there is little to no chance of a Chancellor righting this wrong.

Why are we making this point? A client who was non-UK resident held an asset with a large uncrystallised gain, the asset was to be sold prior to arriving in the UK, with foreign tax paid and the remainder being capital, free to be used here. However, there was a delay in the transaction and the sale happened after he arrived in the UK. Our client was resident in the UK for only a matter of days prior to disposal, but now the entire gain is liable to UK tax. Fortunately (if that is the right word) the remittance basis applies as the client is non-domiciled and no UK tax is due, provided that the proceeds remain outside the UK. Whilst his domicile status came to save him, he cannot enjoy the gains in the UK without triggering a tax charge and will have to use other sources of capital to fund his UK lifestyle.

On one level, you may say the moral of the story is not to cut it so fine, but the sale was supposed to happen months prior to his arrival and for other reasons UK residence could no longer be "put off", but with an extension of the UK's territorial tax system to gains, this would not be an issue.

Originally published July 2021

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