Prospect of ‘Exit Tax’ highlights the importance of accelerating your exit planning

On the basis of this policy, a top rate taxpayer would pay £20,000 exit tax on every £100,000 gained from the disposal [or deemed disposal] of their assets when leaving the UK.

But with CGT rates potentially set to be aligned with Income Tax Rates in the forthcoming Budget, this could increase to an exit tax of £45,000 on every £100,000 gained.

How does the Australian ‘Exit Tax’ Process Work?

When Australians leave Australia and become non-residents for tax purposes, they face a form of
‘exit tax’ through Capital Gains Tax (CGT) rules. Here's how it works:

1. ‘Deemed Disposal of Assets’ - On leaving Australia, certain assets are treated as if they’ve been sold at their market value, even if they haven’t. This means CGT is triggered on the increase in value since they were acquired. This ‘Deemed Disposal of Assets’ applies to assets like shares, bonds, and foreign investments but excludes Australian property.

2. CGT Deferral Option - Individuals can choose to defer paying the CGT until they actually sell the assets. Once deferred, the tax liability remains in place, and they must pay CGT when the assets are sold in the future. If the assets increase in value during the deferral period, then the CGT payable when the assets are sold will reflect that increase in value.

3. Assets Not Subject to CGT - Australian property (e.g. real estate) and some other Australian business assets are not subject to CGT upon departure. These will only be taxed when sold, regardless of residency status.

4. Superannuation - Superannuation [pension] funds are generally not affected by CGT on leaving the country. Withdrawals from superannuation are taxed similarly to how they would be for residents.

Australian ‘Exit Tax’ Worked Example:

Jane, an Australian resident, decides to move abroad and becomes a non-resident for tax purposes.
She owns:

• Australian Property - Valued at AUD 1.2 million. No CGT on departure.
  She will only pay CGT if she sells this property while living abroad.
• Australian Shares and Bonds: Jane is deemed to have "disposed" of her Australian company shares and bonds upon becoming a non-resident. The Capital Gain would be calculated as:
  - Market value at the time of departure: AUD 500,000
  - Purchase price: AUD 300,000
  Capital Gain: AUD 200,000
• Foreign Shares: These foreign assets also trigger a CGT event upon leaving Australia.
  - Market value at the time of departure: AUD 200,000
  - Purchase price: AUD 100,000
  Capital Gain: AUD 100,000

Total Taxable Capital Gain Upon Departure: AUD 300,000

Jane has the option to pay the CGT immediately or defer it until she actually sells the shares and bonds.
- If she pays CGT immediately: She will pay tax on the AUD 300,000 Capital Gain at her marginal tax rate.
- If she defers CGT: She will only pay when she sells the shares, but CGT will be based on value at time of sale.