the message in the fortune cookie says "move to Monaco"

How to avoid capital gains tax

You are a successful British businessman, sitting on an offer from a private equity fund to buy your business for £1bn. The UK has, by international standards, a pretty low rate of tax on capital gains – 20%. But you’re unconvinced that the Government will make the best use of your £200m, when there are much more important things you could do with it.

You assemble a crack team of highly paid advisers and set them to work. You are expecting a lengthy memorandum and a large bill, so are surprised to find the answer written inside a fortune cookie1Original fortune cookie image by Hannah Edgman and modified/published under the terms of the Pixabay licence.

You buy a modest apartment in Monaco, at which point you have satisfied the exacting Monegasque residence requirements and are entitled to stay there as long as you like. You leave the UK on 4 April 2023 to begin your new life as a tax exile.

A few days later you sign the deal, and bank £1bn with no tax to pay. The only price is exile for five years – but you can take a bit of inconvenience for £200m.

What’s the trick?

There is no trick. The UK taxes UK residents on their capital gains. But if you leave the UK you cease to be UK resident, and so you’re not taxed on your capital gain. In many cases, the country you move to would tax the capital gain instead, but Monaco (which is absolutely not a tax haven) has no capital gains tax.

It’s not quite that easy, because following some well-publicised cases of people fleeing the UK, making a tax-free capital gain, and returning, a special rule was created to tax “temporary non-residents”. If you leave the UK but become UK resident again within five years, any capital gains you made during the five years are immediately taxable

So our tax-avoiding just-about-billionaire needs to be very careful not to become UK resident within five years. Assuming he doesn’t want to sell his UK home, he can’t spend more than 30 days in the UK for his first three years of exile). After that, things are a bit more relaxed – potentially up to 90 days. And after five years, he can return home, become UK resident again, and the £200m will forever be untaxed.

Is this fair?

I don’t think it is. If you spend years in the UK building up your business, it’s only right that the UK should have the right to tax the gain you make on selling that business. And it seems nuts for the tax system to incentivise people to leave.

Yet this is very common – check out the number of British-by-birth Monaco, Switzerland and Singapore residents on the Sunday Times Rich List.

Shouldn’t we change the law?

How should the law change?

Most comparable countries have “exit taxes” which prevent someone escaping capital gains tax by leaving the country. Typically how this works is that the tax rules deem you to sell your assets now, and if there’s a gain then you pay tax now – not when you later come to sell. This is a bit unfair, particularly if you don’t have the cash to pay the tax – so many countries let you defer the tax until a future point when you actually sell the assets2often you have to provide some form of guarantee so you can’t just promise you’ll pay in future, and then scarper. And if your new home taxes your eventual sale, then the old country credits that tax against your exit tax.

For example:

  • France has a 30% exit tax on unrealised capital gains, with a potentially permanent deferment if you’re moving elsewhere in the EU, or to a country with an appropriate tax treaty with France.
  • Germany has a 30% exit tax on unrealised capital gains. If you’re moving elsewhere in the EU you used to get a deferral; from the start of 2022 you instead have to pay in instalments over seven years.
  • Australia has an exit tax on capital gains tax – unrealised gains are taxed at your normal income tax rate for that year. There is an option to defer that I don’t pretend to understand, but it seems to involve your assets continuing being taxed in Australia even though you’re not resident there.
  • The US has a truly horrid exit tax for people leaving the US tax system by either renouncing their citizenship, or giving up a long-term green card. Unrealised gains in their assets, including their home, become subject to capital gains tax at the usual rate. Particularly harsh on “accidental Americans” who were born in the US but have never lived there.
  • Canada is of course much nicer than the US. Unrealised gains are taxed, but there’s a deferral option, and your home isn’t taxed at all.

Why didn’t the UK create an exit tax years ago? Because EU law makes exit taxes unworkable. You can’t charge an exit tax on people moving within the EU, and that creates a massive Cyprus-sized loophole, as some EU countries don’t impose CGT on foreign assets. Germany is attempting to ignore this, and I expect that will not end well.

So Rees-Mogg is correct – broad, sunlit uplands await the post-Brexit UK, because we can finally introduce an exit tax regime that will work3Nerds will worry that the UK’s many double tax treaties make this hard, because we often give up our right to tax non-residents on their capital gain. To which I say: easy, deem the tax to apply on the last day they were UK resident, so the treaty ain’t relevant. And then expressly override the treaty anyway, just to be safe. After all, treaties are supposed to be used to prevent double-taxation, not to avoid taxation altogether.4Exit taxes are dangerous things, because if potential tax-exiles think you’re going to introduce an exit tax, they may skedaddle immediately. So the exit tax should be announced suddenly and with great fanfare, and made retrospective to the date of the announcement. Would also need to deal with attempts to circumvent the tax with dividends, but now we’re getting into too much detail for a simple blog post….

So why don’t we?

Caveats

None of this is legal advice. Anyone stupid enough to plan their tax affairs on this basis deserves everything they get. Anyone wanting impartial and clear advice on how to avoid capital gains tax should go to this well respected independent adviser.


  • 1
    Original fortune cookie image by Hannah Edgman and modified/published under the terms of the Pixabay licence
  • 2
    often you have to provide some form of guarantee so you can’t just promise you’ll pay in future, and then scarper
  • 3
    Nerds will worry that the UK’s many double tax treaties make this hard, because we often give up our right to tax non-residents on their capital gain. To which I say: easy, deem the tax to apply on the last day they were UK resident, so the treaty ain’t relevant. And then expressly override the treaty anyway, just to be safe. After all, treaties are supposed to be used to prevent double-taxation, not to avoid taxation altogether.
  • 4
    Exit taxes are dangerous things, because if potential tax-exiles think you’re going to introduce an exit tax, they may skedaddle immediately. So the exit tax should be announced suddenly and with great fanfare, and made retrospective to the date of the announcement. Would also need to deal with attempts to circumvent the tax with dividends, but now we’re getting into too much detail for a simple blog post…
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3 thoughts on “How to avoid capital gains tax”

  1. Rehan 23 May 2022

    Why don’t we change? Donations dear boy, donations.

    • Dmitry 24 May 2022

      By establishing a “home” in Monaco, can’t they bring it up to 45 days in the UK at least?

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