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Investment for Expats in the United Kingdom

Submitted: July 2013

Do not underestimate inflation in the UK. Beating inflation can be a serious challenge for UK residents, as UK savings accounts may be not enough to preserve the value of your savings.

Negative real interest rates have been part of monetary policy since the BoE lowered the central bank interest rate to 0.5% in the midst of the 2008 financial crisis . This is a form of financial repression which allows for lower borrowing costs and lower interest rates on savings. Typically, the value of your savings may be eroded by around 2%, even if they are invested on an interest-paying sterling savings account.

The UK has a historical track record of resorting to negative real interest rates to ease the debt burden. This is sometimes referred to as “silent default” and was widespread practice until 1980 because of the war debt.

 

Sterling savings accounts

Basic savings accounts generally have a low yield (around 1%), and they are subject to tax. However, you might find a bank or a building society that offers a high yield on regular monthly savings. Online banks may also offer higher yields.

 

Gilts and NS&I

A “gilt” is a UK Government bond. It is sometimes called a “gilt-edged security”. Yields may be very low due to high demand and monetary policy. Interest is paid gross, but it might be subject to income tax.

For more information on gilts, click here.

National Savings & Investments products are backed by the UK Treasury. Some NS&I products are tax-exempt while others are taxable. You might wish to compare with similar products offered by private banks.

A list of NS&I products is available on the NS&I website.

 

ISAs

Individual Savings Accounts (ISAs) are tax-free savings accounts, on which you can deposit no more than a specified amount of money per year. Cash ISAs are like standard savings accounts, but they are tax-free and generally offer a higher yield (around 2%). Cash ISA yields are not inflation-busting, but they may substantially limit purchasing power erosion.

On the other hand, a stocks and shares ISA is designed for investment, although it is not always possible to invest directly in shares. An ISA can be opened only with an HMRC-approved ISA manager.

In 2013/2014, the annual ISA allowance is £5,760 for cash ISAs whereas it is £11,520 for stocks and shares ISAs. All transfers to cash ISAs must be deducted from your annual stocks and shares ISA allowance.

ISAs attract exemption from UK income tax only. You might wish to seek professional advice regarding ISA planning.

 

UK securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade UK securities. There are four costs you should be aware of:

  • Stamp Duty Reserve Tax (SDRT) is levied on UK shares purchases at a rate of 0.5%
  • Broker’s commission fees
  • PTM Levies, and
  • Any other applicable fees that may be charged by your broker, e.g. management fees, etc.

SDRT is levied on UK shares purchases at a rate of 0.5%. UK brokers typically charge no less than £12.5 per transaction, although some brokers may decide to do otherwise. A £1 PTM Levy is charged on all transactions in excess of £10,000.

 

UK Securities (overview)

The United Kingdom has a well-established tradition of financial intermediation. Therefore, exposure to the stock market is made possible by signing up to Open-Ended Investment Companies (OEICs) or Unit Trusts. These are normally subject to SDRT, although you don’t bear SDRT costs directly, but rather through the fees charged by your fund manager.

On the other hand, “DIY investing” (e.g. choosing for yourself the securities you want to invest in) is a growing trend in the UK, and some brokers are specialised in DIY investing. Typically, these brokers are also ISA or SIPP managers. This is important to know as some “mainstream” ISA managers do not offer DIY investing facilities on their stocks and shares ISAs.

 

Overseas investments

If you wish to invest in overseas assets, there are a few points you need to check:

  • SDRT and foreign financial transactions taxes;
  • Inheritance tax considerations;
  • Asset liquidity;
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another);
  • Foreign withholding or income taxes;
  • Your liability to UK tax (arising basis or remittance basis);
  • Any foreign financial restrictions or barriers (including fees for international money transfers), and;
  • Foreign currency exposure. See Foreign Exchange for Expats in the UK.

Retaining overseas assets might be helpful if you plan to return to your home country. Ring-fencing your UK assets can be a useful strategy. See Money Transfer for Expats in the UK.

 

Foreign currency investments

Expatriates may consider buying foreign currency assets as a hedge against UK inflation. Nonetheless, foreign currency exposure is complex financial engineering, and you might wish to seek professional advice to help you take the right decisions. See Wealth Management for Expats in the UK.

 

Taxation

The first thing to do is to check your residence status, as UK investment income is likely to be tax-exempt if you are a non-UK resident.

UK tax is payable at different rates depending on income types, but your income is aggregated for the purposes of determining your tax bracket. Typically, earned income and rental income are taxed first, but you might wish to check in greater detail the ordering rules applicable to you.

A personal allowance of £9,440 (2013/2014) may be deducted from your taxable income, unless your “adjusted taxable income” exceeds £100,000, in which case it is reduced by £1 for every £2 above that income limit.

In 2013/2014, the personal income tax rates are as follows:

                      Income bracket (£)

Tax rate (%)

0 to 2,790 (starting rate for savings)

10

0 to 32,010 (basic rate)

20

32,011 to 150,000 (higher rate)

40

150,001 and over (additional rate)

45

 

Interest is taxed at the abovementioned personal income tax rates. However, interest may be taxed at 10% if it falls within the starting rate income band. As interest income is taxed last, you cannot benefit from the starting rate if your other income items push you above the starting rate limit.

Capital Gains Tax (CGT) is charged on your net aggregate gains. Your chargeable gains are exempt on the first £10,900 in 2013/2014.

In 2013/2014, the capital gains tax rates are as follows:

                  Aggregate income bracket (£)

Tax rate (%)

0 to 32,010

18

32,011 and over

28

 

There is no withholding tax on UK dividends. Consequently, dividends are taxable through self-assessment. In 2013/2014, the dividend tax rates are as follows:

                  Aggregate income bracket (£)

Tax rate (%)

0 to 32,010 (basic rate)

10

32,011 to 150,000 (higher rate)

32.5

150,001 and over (additional rate)

37.5

 

You shouldn’t rely on the above table to determine your effective dividend tax rate. In fact, a notional tax credit of 1/9 of your net dividend must be added back to your taxable dividend. You can then use this tax credit to reduce your dividend tax liability.

Example

You receive £1,000 worth of UK dividends.

Your dividend tax base is 1,000 + (1/9)*1,000 = £1,111. Your tax credit is £111.

If you are a basic rate taxpayer, the dividend tax is 1,111*0.1 = £111, which is reduced to £0 after your tax credit. The effective tax rate is 0%.

If you are a higher rate taxpayer, the dividend tax is 1,111*0.325 = £361, which is reduced to £250 after your tax credit. The effective tax rate is 25%.

If you are a basic rate taxpayer, the dividend tax is 1,111*0.375 = £417, which is reduced to £306 after your tax credit. The effective tax rate is 30.6%.

 

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