How to Reduce Capital Gains Tax: What HNWIs Should Know

One of the greatest obstacles to building and preserving wealth for any high-net-worth individual (HNWI) is the capital gains tax. 

Whether you’re an entrepreneur selling your business, a real estate investor cashing in on a property or a crypto trader exiting a high-stakes position, the tax can take a painful chunk out of your profits.

But it doesn’t have to be.

With careful planning, moving abroad can help you legally reduce or even eliminate your capital gains tax (CGT) burden.

While most governments want a cut of your success, not all of them take it. Some countries offer zero capital gains tax, while others have legal exemptions if you structure your residency and investments properly. 

In this in-depth guide, the Nomad Capitalist team explores some of the best tactics and countries to eliminate your capital gains tax bill.

Before we do, there’s one essential thing to understand: advance planning is everything.

Moving after the sale is too late. The sooner you establish a clear offshore strategy, the more you can benefit from it. Reach out to us and let our team help you plan this properly.

Understanding CGT on Foreign Investments

Capital gains tax is trickier to plan around than ordinary income tax. Unlike income tax, CGT is a one-time event that you need to consider long before the sale takes place. 

If you’re facing a major liquidity event, like selling a business or a high-value investment, it’s critical to get expert advice early and explore all your options before you make a move. 

Selling a business, offloading stocks or liquidating real estate all come with different tax treatments. The strategy you use to reduce CGT will depend on your situation.

Real estate often gets preferential tax treatment in many countries, with exemptions for primary residences or lower tax rates on long-term holdings. 

Stocks, crypto and other paper assets face varying tax rates depending on whether the gains are classified as short-term or long-term. And if you’re a high-net-worth individual selling a business, the structure of your sale, whether it’s an asset sale or a share sale, can dramatically affect how much tax you owe. 

Every country has its own approach to CGT. The US, for example, taxes its citizens on their worldwide capital gains, no matter where they live. There’s also an exit tax if you renounce your citizenship – something else you’ll need to plan for when relocating your assets.

Most countries have capital gains taxes in some form, but they stop taxing you once you become a non-resident. 

Some countries entirely exempt foreign investors from capital gains tax. These are the places you’ll want to become tax resident in before any significant sales.

But you need to plan ahead. One of the biggest mistakes people make when moving abroad to reduce CGT is assuming that moving at the last minute will solve everything. 

The tax authorities are well aware of such strategies and many countries have anti-avoidance rules to prevent you from dodging taxes with a quick relocation. 

Another misconception is that simply being offshore means you’re exempt from capital gains tax. While it’s true that some countries offer zero CGT, your home country’s tax rules still apply unless you properly sever tax residency. 

Eliminating CGT: Benefits and Considerations 

Reducing or eliminating your CGT burden by moving abroad is never as simple as just packing your bags and leaving.

Below are some pros and cons to consider when planning your long term capital gains strategy.

Benefits for HNWIs

Obviously, the major benefit of moving abroad for a HNWI is that you can legally pay little to no CGT by establishing residency in a tax-friendly country. 

Many jurisdictions with zero CGTs also offer business-friendly policies, strong banking systems and a high quality of life. These places are also likely to have no, or very little, ordinary income taxes.

Generally speaking, living abroad comes with the need for a second residence permit or even a second passport, which offers lifestyle benefits far beyond the tax savings.

Considerations for HNWIs

Not all tax-free countries are the right fit.

Some have high living costs, complex residency requirements or restrictions on foreign investors. 

Establishing proper tax residency takes time and not doing so correctly could leave you liable for taxes in your home country. 

High-net-worth US citizens need to be extra careful, as the US taxes its citizens worldwide. 

Unless you move to Puerto Rico or renounce your citizenship, you’ll still have to file taxes with the Internal Revenue Service (IRS). You’ll also need to account for exit taxes before you move, which adds another layer to your tax planning. 

This is why advance planning is so important. You can still save significant amounts by paying an early exit tax and then selling your business a few years later once you’ve established tax residency in the right jurisdiction.

How to Avoid Capital Gains Tax (Legally)

Legally avoiding capital gains tax comes down to where you live and how you structure your investments. 

The key is to establish tax residency in a country that either doesn’t tax capital gains or offers exemptions you can take advantage of. 

While there are many different capital gains tax loopholes and reduction tactics you can make use of, gaining tax residency in a zero-tax country before your asset sale is the ultimate strategy.

But remember, simply moving abroad isn’t enough. 

You need to plan your move carefully, understand the residency rules, and, in some cases, use offshore entities to structure your assets in a tax-friendly way.

Many countries use a worldwide tax system, meaning they tax you on all your income and gains, no matter where they’re earned.

On the other hand, territorial tax countries, like Malaysia, Singapore and Panama, only tax income earned within their borders. This means foreign capital gains are completely tax-free. 

Offshore companies and trusts can add another layer of protection. By holding your investments through an offshore entity in a tax-friendly jurisdiction, you can structure your assets in a way that minimises or defers capital gains tax. 

Countries like the Cayman Islands, the British Virgin Islands and even the UAE offer zero-tax structures that can work for stocks, crypto or business sales. 

Offshore trusts, especially in places like the Cook Islands or Belize, can also be used to hold investments tax-efficiently. 

But don’t assume that simply opening an offshore account means you’re exempt – your tax liability still depends on where you legally reside.

How to Reduce CGT on Real Estate

Real estate follows different tax rules because it’s tied to the country where the property is located. Quite simply, you can’t move your real estate offshore.

Unfortunately, if you hold real estate in a country like the US, you’re not going to get away from capital gains taxes – even if you’re a tax resident in a zero-tax jurisdiction. But, if you’re a real estate investor, then you may want to take a more strategic global approach for your next investment.

Some countries, like Monaco and the UAE, have no CGT on property sales at all. Others, like Portugal and Spain, allow exemptions if you reinvest the proceeds into another property or meet certain residency requirements. 

Holding periods matter too. Some countries tax property gains at a high rate if you sell within a few years but reduce or eliminate the tax if you hold the property long-term. 

If you’re a HNW real estate investor looking to cash out tax-free, you’ll want to choose the right country to buy, hold and eventually sell. 

How to Reduce CGT on Stocks

For stocks and securities, tax-free jurisdictions like Singapore and Hong Kong are strong choices. 

These countries don’t tax capital gains on stocks or other financial instruments that are not held there, making them good options for traders and long-term investors. 

Offshore brokerage accounts can also help, as some jurisdictions don’t impose taxes on trading activity, even for non-residents. 

However, tax treaties can complicate things. 

If you’re still considered a tax resident of a country that taxes capital gains, using an offshore brokerage alone won’t shield you. For stock investors, the best strategy is to fully relocate to a zero-tax country or one that specifically exempts foreign securities from CGT.

If you invest in dividend-paying stocks, your investment strategy should be different from that of a capital gains investor. 

Countries like Singapore and Hong Kong not only exempt capital gains but also don’t tax dividend income from foreign companies, making them ideal for high-dividend investors.

On the other hand, some countries have low or no CGT but still tax dividends at high rates, which can eat into your returns. 

If you’re relying on portfolio income, choosing a residency where both capital gains and dividends are tax-free will maximise your profits.

Best Countries to Reduce Capital Gains for HNWI

The trick to reducing taxable capital gains abroad is knowing where to establish tax residency before a major liquidity event. 

As mentioned above, Hong Kong and Singapore can be good options for investors who trade stocks or run businesses that do not trade there. 

If you prefer a sunny tax haven, the Cayman Islands and Monaco both have zero capital gains tax and high-end living. 

The Cayman Islands is a go-to for hedge funds and crypto investors, while Monaco attracts the ultra-wealthy looking for stability and prestige. 

Residency in Monaco requires a serious financial commitment (at least €500,000 to €1 million), but the tax benefits could make it worthwhile, depending on the asset sale you’re planning.

For a more low-key tax haven, Belize offers tax-free capital gains along with an affordable cost of living and residency programs that are easy to qualify for. New Zealand is another good option, with no CGT on most investments, though certain real estate transactions can be taxed.

High-net-worth Americans (particularly traders and crypto investors) looking to eliminate US capital gains tax could also consider Puerto Rico. As a US territory, it offers unique tax incentives, including a 0% capital gains tax rate for qualifying residents. 

Unlike renouncing citizenship, moving to Puerto Rico lets Americans keep their passport while legally eliminating capital gains tax on future investments.

However, you’ll need to first establish a life in Puerto Rico to qualify. You can’t just hop over to the island when you’re ready to make a major sale or trade.

Switzerland and Belgium also make the list. Switzerland doesn’t tax capital gains on personal investments, though professional traders may be subject to tax. Belgium generally exempts capital gains unless the transactions are deemed speculative. 

Reduce Capital Gains Tax:  FAQs

HNWIs Reduce Capital Gain Tax by Moving Abroad

Legally eliminating CGT on a major sale is entirely possible, as long as you don’t take shortcuts.

You’ve got to think ahead and choose the right jurisdiction, set up proper tax residency and structure your assets strategically. 

There’s no ‘best’ country to do this, and there’s no cut-and-paste strategy you should follow. 

Instead, you’ll need a carefully planned strategy that weighs up your entire situation – including your citizenship, lifestyle preferences and future plans for your business or assets. 

If you’re on the verge of selling your business, it’s too late to just fly into a zero-tax country. And if you’re a US taxpayer, then you’ll also need to consider factors like your global reporting requirements to the IRS or an exit tax if you plan to renounce your citizenship. 

This is why we take a bespoke approach with all of our clients. 

We won’t simply tell you to move to Puerto Rico or buy a Caribbean passport because, in the long run, that might not work for you.

Instead, we can help structure your business offshore, move your assets strategically and create a residence and citizenship plan that helps you keep more of your wealth and live a more rewarding life.

If you’re ready to go where you’re treated best, get in touch to create your personalised strategy.