Realising Crypto Gains outside the UK

8 September 2021

With the price of crypto assets generally making a good recovery from the Covid-19 related decline of 2019 contrasted with the very recent volatility following issues with the adoption of the cryptocurrency as legal tender in El Salvador, investors in cryptocurrencies might be considering realising some of their gains to try to help minimise any further instability.  


However, as a UK tax resident, this can result in a significant capital gains tax (“CGT”) bill as a UK resident higher rate taxpayer will be subject to CGT at 28% on gains from residential property and 20% on gains from other chargeable assets. As such, an increasing number of crypto investors are considering leaving the UK in search of a jurisdiction where CGT rates are significantly lower.  

However, the temporary non-resident rules in the UK mean that an individual is likely to have to be resident outside the UK for a period of at least 5 years to prevent any gains realised whilst abroad becoming taxable in the UK in their year of return. 

This note looks at the rules that determine when a UK resident will lose their UK tax residency status. 

When is an individual tax resident in the UK?

The tax residence of an individual in the UK is determined by the statutory residence test (“SRT”).  This test is complex but provides a set of rules under which an individual can identify fact patterns which, if achieved, ensure that they will be considered non-UK resident for tax purposes on leaving the UK.

The SRT applies only to individuals, not companies and primarily determines an individual’s liability for the purposes of income tax and CGT[1].  The SRT consists of three parts which each contain their own criteria and which are applied to an individual in the following order:

  1. The automatic overseas test;
  2. The automatic UK test; and
  3. The sufficient ties test.

Each part of the test needs to be considered carefully, in particular where the automatic tests cannot be satisfied and the sufficient ties test applies to the individual.  The sufficient ties test has different criteria for people arriving in the UK and for those departing.

HM Revenue & Customs have recently published a “cryptoassets manual” which confirms that, in their view, exchange tokens (i.e. cryptocurrency) are located where the beneficial owner is resident. However, an insightful article published by the Society of Trust and Estate Practitioners on 3 September 2021 highlights the fact that this view may not be adopted universally and considers the wider challenges that could be faced when reporting crypto asset gains to HMRC[2].

Leaving the UK and the SRT

Significant tax reforms have been passed in relatively recent times in order to prevent individuals who are long-term residents of the UK from leaving for a short period, realising their gains at a lower tax rate than in the UK and then quickly returning. The rules relating to temporary non-residence do not, therefore, apply to individuals who have been UK tax resident for only four of the seven years prior to their departure from the UK.

Most residents leaving the UK for the purposes of realising gains will want to return to the UK if not permanently, then at least for short periods of time and an analysis of how they can do so whilst remaining non-UK resident is set out below.

An individual will meet the criteria of the automatic overseas test where they spend 15 or fewer midnights in the UK and ensure that their single day visits to the UK and days of departure from the UK are below 31. By spending such little time in the UK, the automatic overseas test can be satisfied so the number of ties that they have to the UK will be irrelevant. This means that they can retain a property in the UK and that the amount of time spent in other countries will not impact their UK tax residency status.

The automatic overseas test will also be satisfied if full time work abroad is taken up by the individual. This test is less easily satisfied and requires detailed record keeping and analysis as the following conditions must be met[3]:

  •        Sufficient hours outside the UK (without a significant break) must be worked. This is calculated over the year and subject to a “net overseas hours” test but crudely breaks down to 35 hours a week.
  •        No more than 30 days can be worked in the UK.
  •      No more than 90 days can be spent in the UK, less any days which are deductible in special circumstances under the rules.

Traps that people leaving the UK to take up work abroad often fall foul of are that travel time and informal activity dealing with emails or phone calls can count as work so meticulous records need to be maintained if frequent visits back to the UK will be made.

If, after careful analysis, the above conditions can be satisfied, an individual should be able to visit the UK for up to 90 midnights each fiscal year running from 6 April to 5 April whilst working overseas.

Even if employment abroad is not taken up, it is possible to move abroad and to spend up to 90 midnights in the UK. However, if a home is retained in the UK and not rented out, it will be necessary for the individual to have a home available to them in their new country from day one to avoid remaining UK resident under the rules that specifically relate to home ownership. 

Special conditions in relation to residence also apply if the individual dies during the year in which the gains were realised outside the UK.

In order to avoid falling foul of the temporary non-resident rules, in practical terms, an individual will need more than five calendar years of non-residence to avoid their gains being subject to CGT in their year of return to the UK. This is the case, even if all of the gains made are kept outside the UK.

Consequently, the decision to leave the UK to benefit from a lower CGT rate may be a difficult one to make.  If you do have significant gains which you are hoping to realise from outside the UK it is essential to plan well for this and our private client, crypto asset and tax teams will be very happy to provide advice.

This article was originally published by WealthBriefing on 20/09/2021 and can be read here (subscription required).

Further information

If you would like any further information or advice about the topic discussed in this blog, please contact Laura Harper or our Private Client team.

 

About the author

Laura Harper is a partner in the Private Client team. She advises both UK resident and non-UK resident/domiciled individuals, families and trustees on a wide variety of UK tax, trust law and international estate planning issues, including the planning to be undertaken when moving to or from the UK. She also has extensive experience working on cross-border matters and structuring involving family-owned businesses.

 

Footnotes


[1] It can also determine the status of an individual for inheritance tax purposes where they are a long-term resident of the UK. 

[2] https://www.step.org/system/files/media/files/2021-09/step_note_location_of_cryptocurrencies-an_alternative_view_0.pdf

[3] Special rules apply to those who work on board a vehicle, aircraft or ship,

 

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