The Upper Tribunal (UT) heard an appeal regarding the residence status of a taxpayer and whether the person was non-resident during the relevant period to avoid having to pay capital gains tax.
Background:
Mr. McCabe is the founder and chief executive of the Scarborough Property Group Plc. The business evolved from being primarily UK-based into a more international operation. Mr. McCabe thought he needed to move to Brussels to develop the European side of his business. Another reason was for the tax planning strategy to avoid being charged capital gains tax under Section 10A of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). This section requires a person to be non-resident for at least 5 full tax years.
He moved to Brussels on the 4th of April 2006 where he remained for seven years. He rented or bought living and office accommodation in Brussels and incorporated the company Scarborough Realty (Europe) SPRL. Mr. and Mrs. McCabe remained married and spent considerable time together during the relevant period.
In July 2007, Mr. McCabe sold most of his interest in Scarborough to an Australian listed property group (Valad Property Group) in return for loan notes and equity in the acquiring companies. He also became a non-executive director of certain Valad group companies. He then transferred his remaining ordinary shares in Scarborough to his sons for no consideration in April 2008.
Mr. McCabe’s self-assessment tax returns were prepared on the basis that he was not a UK resident (or ordinarily resident) during that period. However, in various closure notices, HMRC made it clear that it considered Mr. McCabe to have been resident in the UK during the relevant period, despite him moving back in May 2013.
Decision:
The UT dismissed the appeal and agreed with the First-tier Tribunal (FTT) that Mr. McCabe had not sufficiently loosened his ties with the UK to be regarded as being non-resident. The Tribunal rejected Mr. McCabe’s argument that, because he exceeded the ‘normal’ working week, only the hours worked in Belgium should be taken into consideration.
Even though Mr. McCabe paid more than €2 million in tax to the Belgian tax authority, it was not sufficient to render him non-resident in the UK. He will thus be exposed to capital gains tax on the disposal of his UK business, which occurred during the period over which he claimed to be non-resident.
Based on the double taxation treaty between the UK and Belgium, the UT found that the FTT was correct in ruling that his centre of vital interest was in the UK and not in Belgium. The FTT came to this conclusion by placing greater weight on Mr. McCabe's personal and economic relations in the UK rather than in Belgium.
Implications:
Disputes about a taxpayer’s residence status are always highly fact-specific. However, this case clarifies the test as to whether a taxpayer has sufficiently loosened his ties with the UK to be viewed as a non-resident. People in a similar situation will now have a relatively simple text to work through.
This case is also very interesting as, unlike others who were only established in Belgium for a short period on technical grounds to take advantage of the legislative framework, Mr. McCabe did actually establish his residency in Belgium and established genuine links with the country. This decision is a good reminder that it is important to seek professional advice before moving to another country in the hope of avoiding being charged capital gains tax.