Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving a late dual citizen client (UK/South Africa), capital gains tax (CGT) and inheritance tax (IHT).
The tax query
‘For many years, I have dealt with the tax affairs of a woman born in South Africa. After marrying a UK citizen she obtained dual nationality (ie she has South African and British nationalities).
Over 20 years ago the couple took up permanent residence in South Africa leaving their freehold property in the UK to be let through estate agents. Sadly, her husband passed away during August 2017 leaving his wife as the sole owner of the property.
In September 2023, my client also passed away and the property will be sold shortly. I understand that this will inevitably attract a substantial capital gains tax liability.
The point that I would like to establish is whether the liability can be mitigated by way of concession or legislation considering that my client has been classed as non-resident in the UK for each of the past 20 years. I would be grateful for readers’ comments.’ Query 20,289 – Springbok.
Terry Jordan’s reply: Inheritance tax (IHT) may be the tax to worry about.
‘Springbok’s late client, who died in September 2023, was born in South Africa (SA) and it may be that was her domicile of origin. We are told that she married a UK citizen and if that was before 1 January 1974, she would have taken his then domicile on marriage.
They lived in SA and kept their freehold property in the UK which was let through estate agents. Presumably it was held as beneficial joint tenants or as tenants in common. Prior to 2015 the couple would have been outside the scope of UK capital gains tax as non-UK residents. From 6 April 2015 non-resident CGT was charged on direct disposals of UK residential property. (From 6 April 2019, the scope of the charge was extended to cover all direct disposals of UK property and land, and indirect disposals of UK property or land.)
When the husband died in 2017 his share passed to his wife. Under the provisions of TCGA 1992, s 62 she would have inherited his share at its market value without a charge to UK CGT. For IHT purposes the spouse exemption would have been unlimited unless the husband was domiciled within the UK at general law and the wife was non-UK domiciled in which case it would have been restricted to £325,000. When the wife died last year the value of the whole property would have been uplifted to market value free of non-resident capital gains tax. Only any increase in value to the date of sale would potentially be liable.
UK situs assets have always been within the scope of IHT and, since 6 April 2017, it has no longer been possible for non-UK domiciles to ‘envelope’ UK residential property to protect it from charge (eg in a non-UK resident company). Accordingly, a charge to IHT arose on the wife’s death. As well as her own ordinary nil rate band she may have inherited her late husband’s and, if they had occupied the property as a residence at some point in the past and it is closely inherited by direct descendants, the residence bands may also be available so at best £1m might be IHT-free.
SA is one of the few territories with which the UK has a double taxation convention dealing with is what is now IHT here and estate duty there so reference should be made to the provisions of the treaty. As per Dymond’s Capital Taxes: ‘Article 6(1) says, with admirable simplicity, that immovable property may be taxed in the state in which such property is situated..’
The full article was published in Taxation magazine (issue 4928) and is available to subscribers here on the Taxation website.
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