The destinations that might benefit from a Labour capital gains tax rate increase

With speculation of imminent increases in UK capital gains tax (CGT) rates, some taxpayers are already exploring potential moves away to other tax jurisdictions that could potentially offer a more favourable tax treatment on capital gains. 

It is not, however, as straightforward as some taxpayers may initially assume. In particular, if a capital gain is to fall outside of the UK’s CGT rules, it will typically be necessary for the taxpayer to be non-resident at the time of the capital gain and for them to remain so for over five years. A failure to do so can lead to the ‘temporary non-residence’ rules applying, meaning the gains would become taxable in full when the taxpayer becomes UK tax resident again within the five-year period.

In addition, it’s not simply a case of becoming resident in another country and assuming their CGT rules will apply as a result. An individual could potentially be tax resident in both the UK and somewhere else at the same time. That could happen, for example, if the taxpayer spent half the year in another country but also spent significant time in the UK. In such circumstances, it is possible that UK CGT would continue to apply to the sale of their asset. 

A further barrier is that many countries still apply a form of CGT themselves to any capital gains. It has been common for countries such as Portugal, Italy and Greece to be cited as potential destinations for wealthy UK taxpayers seeking a more favourable tax regime. That may be the case for income tax purposes but it is not necessarily so for CGT. Illustrating the point, Portugal and Italy can charge higher rates of CGT than those currently applicable in the UK.

It is challenges like these which can make the threat of an exodus of taxpayers sound hollow when rumours circulate of a potential CGT rate rise. Where, then, might those casting an eye overseas consider if they looking for a destination with a preferential CGT regime?

Closest to home is the Isle of Man, Jersey and Guernsey. None of these Crown Dependencies apply CGT to capital gains made by individuals. However, with space on these islands at a premium, it can be challenging to satisfy the requirements to become resident there. For example, in order to qualify for high value residency in Jersey, an individual is normally required to buy or lease a high value property, potentially worth over £3.5m for a house.

A similar jurisdiction with ties to the UK which does not apply CGT to its residents is Gibraltar. It also offers a special residency status for high-net-worth individuals under its Category 2 regime. This can cap the individual’s annual tax liability to around £45k but there are various criteria that must be met, such as having a minimum net wealth of £2m.

Those who still have the ability to move to Europe might also consider Belgium. Popular not only for chocolate, beer and waffles, but also because many, though not all, capital gains are not taxable. These rules can be complex so taking professional advice is crucial.

Further afield, there are other countries such as Switzerland, New Zealand and the UAE which also offer a more favourable CGT regime than the UK and can often come under consideration. However, whilst the rate of CGT, if any, may be a factor, any move overseas is unlikely to work long term if it is purely motivated by tax. Many would advocate that it is not a step that should be rushed into and clearly, anyone considering such a move would need to take specific professional advice. It may well be that the grass is not greener overseas and if CGT is a factor, the destination of choice may not have much grass at all.