Expat Tax Efficient Investing

“What a pittance!” is the usual exclamation of any UK expatriate when looking at the return on his UK invested funds. Not surprising with low interest rates in the UK and tax that is often not refundable (e.g. dividend tax). A shrug of the shoulders and the bank statement goes into the folder with no action taken.

Well there are tax efficient investments if the UK expatriate wants to retain emergency funds in the UK. These encompass a variety of possible investments and you can use your UK personal allowance which most expatriates are entitled even if they are living or working abroad. Commonwealth citizens are no longer entitled to these allowances. The Revenue normally offset the allowance initially against the Government state pension if it is being received otherwise it is available to set against income from investments or lettings. This advantageous set off would apply to interest paid by UK building societies and banks but not dividend income where the tax deducted cannot be repaid. Any UK expatriate with bank or building society interest can have the interest paid without deduction of tax.

Also, certain UK Government gilts are free of tax to residents abroad (FOTRA). Any winnings on premium bonds (maximum holding £30K) and existing ISAs are also tax free. If cash liquidity is required then UK building societies and banks will allow instant access but this may attract a penalty on some fixed term accounts. Some investments such as premium bonds are easily liquidated into cash at short notice with no penalty.

So if the UK expatriate wants to keep capital for emergencies what is the maximum amount that can be held tax free in the UK? This depends on each person’s individual circumstances; if the Government state pension is being received then this will utilise around £5,300 of the above allowance or about £8,200 for a married couple. This leaves an amount of the personal allowance which would be the equivalent tax free interest on capital of around £72,000 at 3%, if you can get that rate! Add this to the maximum premium bonds of £30K and existing ISAs (non UK residents cannot invest in new ISAs) the overall capital in the UK earning tax free interest would be in excess of £290K.

Once this emergency fund has been taken care of is there any real reason to keep capital in the UK? With low interest rates and a minimum tax rate of 20% you should consider transferring the non-emergency capital to an offshore jurisdiction that pays interest gross and has financial services protection. The funds can be denominated in US dollars, sterling, Australian dollars, etc.

Most shares and investments can be transferred into the portfolio bond offshore without the need to sell them. This would effectively take the whole of your investments other than the emergency fund outside the UK tax net. A tax free withdrawal from the portfolio bond can be made each year on a monthly or quarterly basis while the rest of the bond investment continues to grow tax free.

Your UK occupational pension fund could be reinvested in a QROPS under current EU/UK rules and this means it could be UK tax exempt. On death of the pensioner the surviving spouse would be entitled to 100% continuing QROPS benefit whereas commonly only 50% of a UK pension would be currently be paid. QROPS have inheritance tax advantages too and can avoid UK probate. Also, if both spouses happened to die together then the fund could be available IHT free by being written in trust for chosen beneficiaries whereas a UK occupational pension would cease altogether or pay a much reduced benefit to the beneficiaries.

About the Author - Jon Golding ATT TEP is a UK tax reduction specialist with PI Ltd in Kuala Lumpur, Malaysia. Contact (+60) 3 6203 2621 or visit: www.goldtaxservices.com