CGT and Residence

[GaryTheGolfer]

Hello all,
I wondered if someone who likes puzzles might be able to offer some advice/information on Capital Gains Tax (planning/avoidance - not evasion!). I have made a few statements/assumptions below. Please feel free to question these assumptions if necessary.

Current position:
Happily married for 24 years. I am English; my wife is Bermudian. We jointly own two houses that are mortgage-free. I worked overseas for most of my working life and have now retired. One, bought in 1984, has been occupied by us as our Principal Private Residence (PPV). A second house was bought in 2000 and has been rented out ever since. The rental income is declared (and shared) on our tax returns.


Two scenarios (please):
Scenario 1. If I pre-decease my wife, she would want to sell both properties in UK and return to reside permanently in Bermuda. One house is PPR so should be free of CGT (and she would inherit my half free of IHT). I believe that my half interest in the other house would also be inherited by my wife free of IHT. I thought at one time that as long as my widow permanently left UK (for bermuda) and established her residence there, she could sell both the houses free from UK CGT.

The other day I was browsing HMRC website (as you do), and it now appears that she would have been non-resident for 4 (of 7) years PRIOR to leaving UK??? [Ref Para 8.3 of IR20]:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
According to IR20:
Gains by those who leave, or come to, the UK part way through a tax year
8.3 If you leave the UK during a tax year and cease to be resident or ordinarily resident in the UK, you may, by concession (extra-statutory concession D2), not be liable to capital gains tax on gains arising to you from disposals made after the date of your departure. However, if you leave the UK on or after 17 March 1998, you can qualify for this concession only if you were neither resident nor ordinarily resident in the UK for the whole of at least four of the seven tax years immediately preceding the tax year in which you leave the UK.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Am I misreading this? Can she not just relocate permanently to Bermuda and then sell the UK rental house and avoid CGT? If so, which HMRC document should I be reading? And does it overrule IR20 Para 8.3?

Scenario 2:
Whilst we are both alive, if we choose to sell the rental house, what can we do to avoid or mitigate CGT? (eg Live in it, Trust, Ltd company, mortgage?)

Many thanks in advance
Gary

[Grange]

(and she would inherit my half free of IHT)

Probably not. Your wife appears to be non-domiciled, so she can only inherit the nil rate band plus £55,000 tax free.

[GaryTheGolfer]

Ooops!

Thanks for your prompt answer Grange.

I thought I was opening just one can of worms but I now realise I have at least TWO separate cans of worms!!

OK so there are IHT issues AND CGT issues.

With respect to IHT, could this issue be resolved by changing my wife's domicile (declaration of choice to HMCR)? If we were both UK domiciled at my death she would inherit my shares in the houses free of IHT....wouldn't she?

If this resolves the IHT issue, it may make the CGT situation (even) worse I suppose?

Also any ideas on the CGT?

Thanks again
Gary

[jeffrey]

Your wife appears to be non-domiciled..

Grange:
Not necessarily: nationality can be acquired differently from domicile.
Gary:
Where do you both live and have you both been settled there for a long time?

[Grange]

If I pre-decease my wife, she would want to sell both properties in UK and return to reside permanently in Bermuda.

Non-domicilied without any shadow of doubt whatsoever in my mind. She is only in the UK because of our golfing OP, the moment he is dead, she will be off back to Bermuda like a shot. In what sense has she acquired a UK domicile?

Sadly for OP, a wife's domicile no longer follows that of her husband.

Surreally, if she were to die first, of course, she would presumably be buried in the UK, but that wouldn't make her UK domiciled under the circumstances OP describes.

What if you give her your half of your house now. Provided you survive 7 years, it will be IHT free.


I suggest a trip to a solicitor who will be able to get all your details and draw things up in a sensible fashion.


As for the rented house, yes, you could move in there for a while to mitigate the CGT. Again, you need to be certain that you do not fall foul of the anti-avoidance rules.


Oh yes, and I think that bit of IR20 is only referring to people who leave the UK PART WAY through the tax year. Wait until the next tax year and I think you're OK.

[GaryTheGolfer]

CGT/IHT & Domicile

Thanks again for fast and interesting responses. You have given me more food for thought.

Nationality vs domicile: muddy waters again. My wife has Bermudian nationality by birth (called "status" there). She also has British citizenship since by law in 2002 British overseas territories citizens became British citizens automatically (in most cases I believe). I shall have to investigate this domicile issue...since its the one that apparently affects IHT/CGT.

We were married in 1984 and bought our PPR in that year. We lived in UK for about 2 years before going overseas again (ie the money ran out). We both lived/worked abroad (not in Bermuda) for most of the next 15 years. Since about 2000 we have both lived in our PPR. Throughout the period from 1984, my wife has made annual holiday visits back to Bermuda (2/3 months at a time during the golfing season!). We have no house/accommodation in Bermuda.

Broadly speaking, as inferred, my wife has no real ties to UK and will be off like a shot to Bermuda if I die first....or sooner if we ever find a way to afford a home there....which would probably involve selling the non-PPR house.

As for the IR20 referring to people leaving part way through the tax year: I am still a puzzled. Wouldn't leaving after the end of the tax year simply mean her leaving part way through the next tax year....and hence the same problem? I think you must be right about it being OK. She can't really be liable to UK CGT if she has completely severed all ties with UK, can she? (he said more in hope than expectation.) Perhaps she should wait a couple of years in Bermuda before selling the non-PPR house?

My hope was that, following my death, my wife could relocate to Bermuda and then sell the UK houses (free of CGT & IHT). I can now see that the timing and sequence of house sales in relation to tax year and relocation need to be optimised (for the current tax rules!).

I like the idea of living in the second house for a while as a possible CGT avoidance....if we have time to do it. I believe we would then also have 3 years to sel the (former) PPR free of CGT.

What does bother me a bit is the reference to "anti-avoidance rules". I thought avoidance (as opposed to evasion) was OK. In fact I thought avoidance was almost a civic duty like attempting to escape from a prisoner of war camp!

Anyway, as recommended, my conclusion is that one of my next steps will include a fairly detailed briefing and dialogue with a specialst tax advisor.

The other conclusion is that the more I learn, the more I realise that I need to learn. I can see I am going to have some intellectual fun once again.

Golf is so much simpler!

Thanks again.
(Any more thoughts would of course be welcomed.)
Gary

[Grange]

Avoidance is permissable - if not quite a civic duty. But HMRC don't like it, so they bring in anti- avoidance rules to counter particular avoidance areas where they feel too many people are saving too much tax. In particular, you have to be careful to get it right if you're going to live in a house purely to use the PPR relief. If they think you're being artificial they have the right to disapply PPR relief.

Wouldn't leaving after the end of the tax year simply mean her leaving part way through the next tax year....and hence the same problem?

No. If she leaves on 1 December then she needs to wait until 6 April the following year before she sells it. Simple. Not an area I've loooked at for years, don't rely on my 'thinking'.

As you haven't lived in your PPR for the entirety of the time you have owned it, there will be CGT to pay based on (broadly) the period of time you did not live there.

[GaryTheGolfer]

Thanks

Thanks for all the comments. Most helpful. Now I will try to find someone who can tie all this together (as well as update the wills).

Thanks again
Gary