Policy paper

Deferral of payment of exit charges for Capital Gains Tax

Published 6 July 2018

Who is likely to be affected

Trusts that cease to be UK resident and certain non-residents that trade through a branch or agency in the UK.

General description of the measure

This measure changes the rules governing when capital gains tax payments must be made to HMRC in respect of exit charges. Exit charges can arise on unrealised gains when a:

• trust ceases to be resident in the UK
• assets cease to be used in a trade carried on through a branch or agency in the UK

This measure provides that in certain circumstances payment of these charges can be deferred.

Policy objective

This measure is designed to benefit UK resident trusts with trading activities; or non-UK residents who trade through a branch or agency in the UK who have decided to move to another European Union (EU) or European Economic Area (EEA) member state and have incurred an exit charge as a result. It does this by allowing them to defer payment of that charge. This minimises the relative cash flow disadvantage when compared to a similar entity remaining in the UK.

On 23 June 2016, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. The outcome of these negotiations will determine what arrangements apply in relation to EU legislation in future once the UK has left the EU.

Background to the measure

In 2017 the Court of Justice of the European Union (CJEU) ruled on the application of exit charges that arise where a UK resident trust ceases to be resident in the UK and moves its place of residence to another EU or EEA member state. In its decision the CJEU found that whilst exit charges are compatible with rules on the right of freedom of establishment the UK should, in the case of those trusts with economically significant activities, have offered them a choice between immediate payment or deferral of the tax that may become due, subject to certain conditions. Subsequently the UK is updating its legislation in line with this ruling.

Draft legislation was published for consultation on 6 July 2018.

Detailed proposal

Operative date

This measure will have effect from 6 April 2019.

Current law

Current law is contained in sections 25 and 80 Taxation of Chargeable Gains Act (TCGA) 1992. Broadly these sections provide that where:

• a non-UK resident individual with a branch in the UK moves assets outside the UK or ceases to trade in the UK

or

• a UK resident trust moves its residence out of the UK
• a charge arises on any unrealised gains on assets held by those persons

Under the Taxes Management Act (TMA) 1970 the charge is payable by the 31 January following the tax year in which the charge arose.

Proposed revisions

The existing exit charge rules will be retained. However, legislation will be introduced in Finance Bill 2018-19 offering certain trusts or non-UK resident individuals who satisfy certain tests the option of deferring the payment and paying it over 6 years in equal instalments. The amounts deferred will be subject to interest. That legislation will be found in a new Schedule 3ZAA TMA.

The exit charge will be deferred where at the time the charge arose:

• a non-resident individual has a right to freedom of establishment in another EU or EEA member state and has transferred assets subject to the charge that are used in or for the purposes of a trade, or used or held for the purposes of a branch or agency
• a trust became resident of, and established in, another member state of the EU or EEA, and the assets subject to the charge were used immediately before and after the change of residence/establishment for an economically significant activity

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
negligible	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

The measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The measure is not expected to impact on individuals or households and only impacts on certain businesses. These are UK resident trusts who trade or non-UK resident individuals who trade through a UK branch. In both cases because these entities are leaving the UK they have become liable to a capital gains tax exit charge.

This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure is not anticipated to have an equality impact on people with any protected characteristics.

Impact on business including civil society organisations

This measure will impact a very small number of trusts and non-UK resident individuals who trade through a UK branch, both of whom have decided to leave the UK and as a consequence have become liable to a capital gains tax “exit” charge. Evidence suggests that the number of these entities who decide to leave the UK every year is very small.

The measure will offer these entities the option to elect to defer the payment of the exit charge, without prejudice to any of their existing rights. The impact is expected to be negligible. One off costs include familiarisation with the tax changes and making a decision on whether to defer the tax. On-going costs include making the 6 annual instalments to HMRC. There is no impact on trusts and non-resident individuals that do not opt to defer payment, and there will be no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The operational impact of this measure is expected to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Nick Williams on Telephone: 03000 585660 or email: nicholas.williams@hmrc.gsi.gov.uk.