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For individuals who are not domiciled in the UK and have lived in the UK for less than seven years, there might be less concern about the taxation of non-UK investments. Legally, these can be overlooked (as long as the income isn’t transferred to the UK) by utilizing the “Remittance Basis” of taxation.
The Remittance Basis is an option available for non-domiciled individuals in the UK, where they can either report their worldwide income and gains as they arise (Arising Basis) or report their foreign income and gains only when they are sent to the UK (Remittance Basis). While this seems beneficial, it does come at a price. The individual loses their right to the personal tax-free allowance and must pay a remittance basis charge after their 7th year of UK residence. Furthermore, non-UK domiciled individuals can claim Overseas Workday Relief (subject to specific conditions).
However, after seven years of UK residency, the Remittance Basis becomes considerably more expensive, requiring an initial £30,000 remittance basis charge or a payment of UK tax on your foreign investments. So, if you are nearing your 8th tax year of UK residency, it’s advisable to consider the tax efficiency of your global investments before they might become subject to UK tax.
Alternatively, if you are a UK-domiciled investor, it’s essential to be cognizant of the possible tax implications of certain non-UK investments. This is not investment advice but a succinct summary of the tax outcomes of particular foreign investments.
The investments discussed here are collective investment schemes (such as funds/units/trusts), often referred to as “Non-Reporting Funds” (NRF). Some non-UK funds have “Reporting” status, agreed with HMRC, that aren’t subject to the harsh tax treatment of “Non-Reporting” funds. The “Reporting” funds are listed by HMRC in their List of Approved Funds. Offshore funds not on this list are considered Non-Reporting Funds.
The tax treatments of the two fund types are as follows:
Reporting Funds: Receive favourable tax treatment, where capital losses can be offset against capital gains, the net gain is reduced by the annual exemption (currently £12,300 for 2022/23), and any residual gain is subject to capital gains tax rates (10%, or 20% for higher rate taxpayers).
Non-Reporting Funds: These are subject to punitive tax treatment. Here, capital gains and losses must be separated. Gains are treated as “ordinary gains, ” and losses remain capital losses and can’t offset each other. The annual exemption can’t be used to reduce the ordinary gain, which is subject to income tax rates (up to 45% for additional rate taxpayers).
This can have a significant impact, particularly if you’ve incurred a series of losses and seek relief by offsetting your gains.
In our observation, these situations are most common when you’ve recently arrived in the UK and hold a non-UK brokerage account. As mentioned, you can claim the Remittance Basis for your first seven years of UK residence. But once you reach your 8th tax year of UK residence, you must decide whether to report your worldwide income and gains on the “Arising Basis” or pay a £30,000 remittance basis charge to continue claiming the Remittance Basis. Typically, it’s sensible to start reporting your non-UK income and gains. At this point, you may discover that you could face a hefty tax bill if you sell your non-UK collective investment funds.
Therefore, if you’re an investor nearing your 8th tax year of UK residence and remain convinced that non-UK collective investment funds are your best choice, you may find it beneficial to consult our Tax Advisors. If you need help regarding tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.