Tax

Realising Crypto Gains Outside The UK

20 September 2021

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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) . 
 

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