How UK expats can minimise tax liabilities while investing abroad
Many UK expats overpay taxes on their overseas investments without even realising it.
That’s why you should review your investments when you move abroad and make sure you’re paying the least tax possible.
The amount of tax you’ll have to pay as a UK expat depends on several factors.
- Duration of your stays in the UK
- Ongoing UK employment status
- Proportion of your income derived from UK sources – including investments
- Whether there’s a double-taxation treaty between your new country and the UK
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In this guide, you’ll find out what taxes you should be paying as a UK expat and how to minimise them.
KEY TAX CONSIDERATIONS FOR EXPATS
Residency Status
In the UK, the Statutory Residence Test determines the amount of tax you should pay. The check includes how long you’ve spent in the UK and whether you have ties here, such as family members or a home.
Under new rules that are due to come into play in April 2025, anyone who has been a UK resident for at least 10 out of the last 20 years will automatically qualify for UK tax on their worldwide income and gains.
The new system marks a shift from the old “non-dom” regime, whereby non-residents were exempt from paying certain taxes. The new Foreign Income and Gains (FIG) system gives you a four-year grace period during which you won’t be taxed on foreign income and gains, but after that you’ll have to pay up.
Other countries handle taxation in different ways.
In the USA and Eritrea, taxation is based on citizenship rather than residency. US citizens and permanent residents are taxed on their global income, no matter where they live or where they derive their income. In Eritrea, the same rules apply, but there’s only a flat rate of 2% imposed on income.
Most other countries tax people according to residency in a similar way to the UK, including countries such as Canada, Australia, and most European nations.
For example, Spain considers someone a tax resident if they spend more than 183 days in the country over the period of one calendar year. This is regardless of citizenship status.
Some countries like Singapore, Hong Kong, and Panama apply a “territorial taxation” system where residents are only taxed on income earned within the country’s borders, regardless of citizenship or where they earned other income.
Other countries combine elements of different systems. For example, they might tax non-resident citizens on certain types of income earned domestically or provide tax credits for taxes paid to other jurisdictions to avoid double taxation.
HOW TO AVOID DOUBLE TAXATION
To avoid double taxation (paying taxes twice in different countries), many countries have tax treaties in place. A tax treaty is a deal between two countries that clearly define where and how you’ll pay your taxes, so you don’t get hit twice.
For example, the Spain-UK Double Tax Treaty Agreement (DTA) avoids double taxation on income such as salary, pension, dividends, or even rental income from properties. The DTA spells out which country gets which taxes. It means you won’t pay taxes in both countries on the same money.
If you already live in Spain or plan to move there on a non-lucrative or golden visa, then you should understand this tax treaty inside-out. This is especially true if you’re buying property there. A tax expert can help ensure you only pay what’s due in each country.
HOW EXPATS CAN INVEST TAX-EFFICIENTLY
If you want to avoid getting hit with excessive taxes as an expat, there are ways to manage your investments in a more tax-efficient way.
USE TAX-ADVANTAGED ACCOUNTS
Also known as “tax-advantaged investment vehicles”, these are investments you can make without paying UK tax on the interest, dividends, or capital gains. There are several types, such as Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs.
If you’re a UK resident, you can pay up to £20,000 into ISAs tax-free. When you move abroad, you’re not allowed to contribute to your ISA, but you can maintain any ISAs you opened while living in the UK. These accounts will continue to enjoy tax-free growth on the investments already paid into them before you left.
If you return to the UK and re-establish residency, you can begin contributing to your ISAs again, with the same annual allowance of up to £20,000. This makes ISAs attractive for people who want to live abroad for a while, but plan to return to the UK in the not-too-distant future.
It’s also worth noting that you have the flexibility to transfer your ISA funds between providers to get better returns or lower fees, regardless of your residency status.
CONSIDER PENSION FUNDS FOR LONG-TERM SAVINGS
Self-Invested Personal Pension (SIPP) are ideal for expats. It’s a type of pension that gives you more control over how your retirement savings are invested. You’re not limited to a few funds picked by a pension company and can invest in a wide range of assets, including stocks, bonds, and property.
When you contribute to a SIPP as a UK resident, you receive tax relief at a marginal rate. This means that for every £80 you put into your SIPP, the government effectively adds another £20 if you’re a basic rate taxpayer. This is because money that would otherwise go to the taxman boosts your retirement savings instead. Higher and additional rate taxpayers can claim further tax relief through their tax returns.
If you’re not a UK resident, then you can still pay up to £60,000 per year into a SIPP, but you won’t get the tax relief.
You can access SIPP funds at age 55 (rising to 57 in 2028) and take 25% as a tax-free lump sum, but the rest will be classed as taxable income. Planning when and how you withdraw money from your SIPP impacts your tax situation, depending on where you live at the time.
LOOK INTO OFFSHORE INVESTMENTS
Offshore investment bonds are like containers that hold your investments and grow tax-free until you pull the money out. They’re set up in places with low tax rates, such as the Isle of Man or Jersey. You typically pay taxes only when you withdraw funds, which can be managed to minimise how much you owe.
You can also park some cash in offshore bank accounts. Offshore bank accounts come in two types – standard and private. Standard ones are good for simple banking outside your home country, while private banks offer more tailored services for managing bigger wealth, including investment advice and confidential handling.
Offshore funds are like mutual funds that are set up abroad, letting you invest in different areas and potentially reducing your tax load. It diversifies your portfolio and spreads risk by not putting all your eggs in one country’s basket.
A quick heads up, though. Offshore investments are often great for tax efficiency but come with their own set of risks like currency changes that might adversely affect your returns. You also need to be careful to stay on the right side of tax laws in all the countries involved.
If you’re serious about exploring any of these investments, you should talk to a financial advisor who understands the risks and tax implications.
EXPLORE QROPS FOR PENSION TRANSFERS
If you’re settling abroad permanently, QROPS (Qualifying Recognised Overseas Pension Schemes) let you move your pension savings to wherever you’re living. This can work out well if you’re moving to a country with lower pension tax rates.
A note of caution – you must set up your QROPS properly, otherwise HMRC can hit you with a 55% tax penalty. Also, if you’re planning to move back to the UK within five years of accessing your QROPS, you can face extra charges.
From October 30, 2024 onwards QROPS made in the EEA and Gibraltar are no longer exempt from the Overseas Transfer Charge (OTC) of 25%.
INVEST IN TAX-EFFICIENT VENTURES
If you’re happy to take on more risk, consider Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS). These are UK-based investments that offer generous tax reliefs in return for investing in small and emerging businesses. Just be mindful that the risks are higher, but then are the potential rewards.
GET PROFESSIONAL ADVICE
If you live abroad and want to get the best return from your investments, speak with a financial advisor that’s an expert in expat finances. They’ll tailor their advice to match your unique situation, helping you avoid pitfalls and make the most of your investments.
