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HMRC internal manual

Double Taxation Relief Manual

Double Taxation Relief Manual: Guidance by country: United States of America: Capital gains

Old agreement: applies for US tax up to 31st December 2003 and UK capital gains tax up to 5th April 2003

The capital gains Article in the agreement (Article 13) differed from the capital gains Article in most agreements (see INTM 153150) in that it provided that each country may tax capital gains in accordance with its own domestic law. As such there was no protection against the double taxation of gains and credit will be due for tax paid in the country where the gain arises.

New agreement

By contrast, the new treaty provides that gains will be taxable only in the country in which the person disposing of the property is resident, except for

gains arising from the disposal of real property situated in the other country;

gains arising from the disposal of the business property of a permanent establishment

In these cases the country in which the real property or permanent establishment is situated has the primary right to tax.

So relief from double taxation is achieved by giving sole taxing rights to the residence country or, where the source country can still tax the gain, by the residence country giving credit relief.

Although the article is based on the OECD Model article it includes additional provisions to deal with specific types of gains such as those arising on the disposal of shares deriving their value or the greater part of their value from real property situated in the UK or the US (the “securitised land” provision) and those realised by temporary non-residents.

The “securitised land” provision

In accordance with the OECD Model Tax Convention the article provides that the UK has the primary taxing right over gains arising from the alienation of real property situated in the UK. Thus, a US resident individual owning real property in the UK would, under the terms of the treaty, be taxable in the UK on any gain arising from the sale of that property.

However, if that US resident individual arranged for the property to be held by a company in which he was the sole shareholder and then arranged for the sale of the shares in that company, the OECD Model wording would give the result that any gain on the sale of the shares would be taxable only in the country of which he was a resident - the US.

To prevent this, the Article provides at paragraph (2)(c)(i) that shares which derive their value or the greater part of their value directly or indirectly from real property situated in the UK will be treated as real property situated in the UK, thereby preserving taxing rights over gains substantively derived from real property. The provision is reciprocal.

The “temporary non-residents” provision

Paragraph 6 of the article aligns the treaty with the UK’s rules in section 10A TCGA 1992.

Those rules aim to stop long term UK residents avoiding UK capital gains tax by becoming temporarily non-UK resident and realising gains while abroad before resuming UK residence.

The provision works by allowing the UK to tax gains arising to US residents who were previously UK residents and who, after having realised gains while being temporarily US resident, return to the UK.

This does not prevent the US taxing the gains of its residents. The primary taxing right always remains with the residence country. But it allows the UK to tax such gains as well, giving credit for US tax paid on those gains.