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Investment Taxation for Expats in the United Kingdom

Submitted: April 2014

Taxable income in this category includes:

  • interest from bank and building society deposits
  • interest from government and corporate stocks (bonds)
  • rental income from properties both in the UK and abroad
  • dividends
  • capital gains, and
  • pensions.

Interest

When a UK bank or building society pays you interest they automatically deduct basic rate tax (20%) so you only actually receive 80% of the full amount. However 20% may not be the final amount you have to pay.

If your other earnings from other sources are greater than £31,865, the actual tax rate you should pay on this additional interest income should be 40% (45% if your earnings are over £150,000) and this will have to be shown in your tax return.

There is also a “starting rate for savings income” which is charged at 10% on amounts up to and including £2,880. This amount is in addition to your personal allowance of £10,000, but can only be applied to interest income. You can reclaim part of the 20% tax already paid by completing HMRC form R40 'Claim for repayment of tax deducted from savings and investments'. For more information see here.

Rental income

If you receive rental income from land and property in the UK, you must inform the HMRC by 5 October following the end of the tax year in which in which you received it. The taxable amount of rental income is calculated after deducting expenses/costs from the gross rental income. It is calculated on a yearly basis and must be included in your annual tax return. Once calculated, it is taxed as part of ordinary income, so a basic rate taxpayer will be taxed at 20%. Taxable rental income from overseas property is calculated in the same way, but it will be entered under foreign income on your tax return.

Dividends

Dividends from UK companies are paid without any deduction of tax. Tax rates on dividends are:

  • 10% for total taxable income at or below £31,865
  • 32.5% for total taxable income at or below £150,000, and
  • 37.5% for total taxable income above £150,000.

Dividends are paid out of corporate earnings that have already been taxed at the company level. To compensate for this, the HMRC allows a tax credit of 10% of the gross amount to be attached to the dividend. This credit can then be used against your final tax liability. This means that a basic rate taxpayer can receive the dividend tax-free. The credit cannot be reclaimed if there is no liability to set it against. UK residents receiving dividends from non-UK companies are entitled to the same tax credit, though certain conditions apply if they hold 10% or more of the shares. Dividend income must be included in your tax return. For more information on dividends see here.

Capital gains

If you dispose of an asset in the UK that is liable for capital gains tax, you must include the profit in your tax return as income. The profit is calculated as the difference between the buying and selling price, after allowing for costs and an indexed amount for inflation. There is an Annual Exempt Amount of £11,000 for capital gains which can be set off against the highest rate of tax paid. Above this amount, profits are taxed at 18% if total taxable income is no more than £31,865, or 28% if it is above this figure. Profits on the sale of your own home in the UK are not liable for capital gains tax.

Pensions

Pension payments from former employers and approved pension funds are subject to deduction of tax under the PAYE system, so the tax is deducted automatically. Any differences between the tax paid and the actual tax owed can be adjusted when you fill in your tax return.

Overseas income and remittance

If you are an expat resident in the UK, but domiciled in another country, and you earn income or gains overseas in any tax year in which you are UK resident, you can choose to pay tax in one of two ways. You can pay tax on all UK and foreign income and gains as a UK resident. In this case you report all income on your tax return and pay tax in the ordinary way.

The alternative is to choose to pay tax on your foreign income and gains on a remittance basis. You still have to pay tax on all UK income and gains, but you only pay tax on income and gains earned abroad when you actually transfer it into the UK. It is important to be aware of any tax treaties which may exist between the UK and your home country. For more information on tax treaties see: Tax Treaty Considerations for Expats in the United Kingdom.

If your total unremitted foreign income and gains for the year is less than £2,000, you will keep your Personal Allowance and Annual Exempt Amount for capital gains tax. You can fill in a standard tax return including the amount actually remitted and pay the tax on it.

If your total unremitted foreign income and gains for the year is £2,000 or more, you will lose the UK Personal Allowance and the Annual Exempt Amount for capital gains tax. You will have to claim to use the remittance basis by filling in a special form with your tax return. In addition you may become liable for a £30,000 or £50,000 remittance basis charge if you have been resident in the UK for more than 7 years. Careful judgement of the pros and cons is therefore required.

There is a special rule which exempts you from paying UK income tax on foreign employment income of less than £10,000 which was taxable in the other country. You must be employed in the UK and pay tax via the PAYE system, have less than £100 of other foreign income (bank interest for instance) and no other foreign income or capital gains, and your worldwide earnings of less than £31,865. For more information on remittance see here and here.

 

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