Section 107 Finance Act 2007 - Financial Discussion

Section 107 of the Finance Act 2007 introduced significant changes to the taxation of capital gains in the United Kingdom, specifically impacting non-UK resident individuals and trustees holding assets within the UK. This section, often referred to as the “temporary non-residence” rule, aimed to close a loophole that allowed individuals to temporarily relocate outside the UK to avoid capital gains tax (CGT) on the disposal of UK assets.

Prior to Section 107, individuals could become non-UK resident, dispose of assets triggering a capital gain, and then return to the UK without paying UK CGT on the gain if the disposal occurred while they were non-resident. This strategy, although legally permissible, was viewed as tax avoidance by the government. Section 107 targeted this practice by introducing a “temporary non-residence” period, defining a specific timeframe that, if exceeded, allowed gains made during the non-residence period to be taxed in the UK upon the individual’s return.

The key principle of Section 107 is that if an individual is temporarily non-resident, any capital gains they make during that period on the disposal of certain assets can be taxed in the UK when they resume UK residency. A “temporary non-resident” is generally defined as someone who was resident in the UK for at least four out of the seven tax years immediately preceding the period of non-residence, and then returns to the UK to become resident again within five tax years.

The implications of this rule are that individuals contemplating a period of non-residence need to carefully consider the length of their absence and the nature of their assets. If they meet the criteria for being a temporary non-resident, any gains realized on the disposal of certain assets, specifically those connected to the UK, during their time abroad may be subject to UK CGT upon their return. This includes gains from the sale of UK property, shares in UK companies, and other UK-based assets.

However, Section 107 does offer some exceptions. Not all gains made during the non-residence period are automatically subject to UK CGT. Certain types of assets, particularly those wholly unrelated to the UK, may be exempt. Furthermore, the rules surrounding temporary non-residence can be complex, and the specific circumstances of each individual case need to be carefully assessed to determine the correct tax treatment.

The introduction of Section 107 significantly impacted tax planning for individuals considering a period of non-residence. It necessitates a thorough understanding of the rules and careful consideration of the potential tax implications before undertaking any significant asset disposals during the period of non-residence. Seeking professional tax advice is crucial to ensure compliance and to mitigate any potential tax liabilities arising from the temporary non-residence rules introduced by Section 107 of the Finance Act 2007.