Capital Gains Tax – What lies ahead internationally

Capital Gains Tax – What lies ahead internationally

Since March this year there has been an unprecedented amount of support from the Government to deal with the economic crisis caused by COVID-19.  Now the Chancellor faces the challenge of having to cover the past and ongoing costs of handling the crisis, whilst at the same time considering possible reforms to Capital Gains Tax (CGT) which may arise from an ongoing review by the Office of Tax Simplification. One possible outcome could be increased taxes on disposals of UK assets, including on disposals made by non-UK residents.

Possible changes

Historically, non-UK residents have not been liable to UK Capital Gains Tax on disposals of UK assets. This started to change from 6 April 2015 onwards, with the introduction of a non-resident CGT charge on disposals of UK residential property. The tax was extended with effect from 6 April 2019 to catch disposals of most direct and indirect interests in UK land.

Further extending non-residents’ liability to CGT to other types of assets, such as UK shares and bonds, may now be seen as a natural next step. The management and tax administration of such a change could lead to complexity but it may also be less politically controversial to levy additional taxes on non-UK residents than to increase taxes for UK residents.

It is possible that, as with UK land disposals, some kind of rebasing would be permitted to prevent the change from having a retrospective effect. However, it is likely that more and more gains would be brought within the scope of the tax as values increase over time, thus generating increasing amounts of revenue for the Treasury.

Such a change would affect not only non-UK resident individuals, but also non-UK resident trusts and overseas estates holding assets which are situated in the UK.

Coming closer to home, it is possible that we could see both UK and non-UK resident taxpayers charged at different rates on short-term and long-term gains if the UK Government takes inspiration from some of its international counterparts, most notably the US. Short-term gains, where the asset has been held for a shorter period could be taxed at higher rates, perhaps equal to income tax rates, while long-term gains could be taxed at lower rates.

Differentiating between gains based on the length of the ownership period could be seen as a desirable way to prevent disposals of assets held for short-term gain from benefitting from favourable CGT rates, while still retaining an incentive for long-term capital investment.

What does this mean for you?

For non-residents holding UK investments other than land-related assets, a change to the legislation could mean increased exposure to UK CGT. Depending on where the taxpayer is resident, relief may be available under a double tax treaty, but this will not apply in all cases. Non-UK residents could also become subject to increased tax reporting obligations in the UK when they dispose of a UK investment.

Distinguishing between long term and short-term gains could affect both UK and non-UK resident taxpayers and is particularly likely to impact on those who sell investments after holding them for only a short period of time.

With all this on the horizon, now is certainly a good time to review potential disposals and look at the timing of these.  For further information, please contact a member of our tax team or your usual Azets contact.