Any decision to leave the UK in order to benefit from a lower capital tax rate should be done with strict adherence to residency rules, so argues the law firm in this article about crypto investing.

The following commentary about the world of digital assets such as bitcoin comes from London law Kingsley Napley. it addresses the thorny issue of capital gains and the tax treatment thereof in the UK, and what crypto investors can do. The author is Laura Harper, partner specialising in UK and international tax planning for both UK resident and non-domiciled individuals.

Clearly, the expanding field of bitcoin and other digital assets means that wealth managers and other advisors need to be on top of the subject. We hope readers find this article valuable. As ever, the editors of this article don't necessarily agree with all views of guest writers. Jump into the conversation. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

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 after 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 minimise any further instability.  

However, for UK tax residents, this can result in a significant capital gains tax (“CGT”) bill since a UK resident higher rate taxpayer will be subject to CGT at 28 per cent on gains from residential property and 20 per cent 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 five years to prevent any gains realised whilst abroad becoming taxable in the UK in their year of return. 

So what are 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 has 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 articled 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. 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. 

So any decision to leave the UK in order to benefit from a lower CGT rate should be made in that context.   

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.