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There is a growing trend of DIY investors who are building portfolios in tax-free countries. These self-managed portfolio’s, often consist of ETF’s, stocks, shares and mutual funds. Over the past few years, these asset classes have for the most part performed quite well, due to strong market performance, as demonstrated below.
Many investors have the desire to build a portfolio of wealth which can be taken back to the UK. However, due to tax constraints, many investors feel they have to either sell investments before returning to the UK or pay a large amount in tax to keep them. This blog will outline one solution how you can keep your portfolio invested without the dividend and capital gains tax liability.
One of the major benefits of living in a tax-free country like the UAE is that portfolio growth either through dividends or appreciation of units enjoyed on these investments is not taxable. Meaning your growth can be reinvested exponentially increasing the size of your investment. This is known as gross roll-up. These investments can also be sold without a tax on the gain in tax-free countries.
James returns to the UK and has an income of £120,000 per annum making him a higher rate taxpayer.
|Personal Allowance||Up to £12,500||0%|
|Basic rate||£12,501 to £50,000||20%|
|Higher rate||£50,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
Capital gains tax
The UK charges capital gains tax on investments – even if you’ve purchased them whilst overseas.
Capital gains tax rates
|Anything which exceeds your basic rate allowance||20%|
When James eventually encashes his portfolio in the UK with a £17,000 gain – he faces a 20% capital gains charge of £3,400.
The UK charges dividend tax.
In the UK people are given an annual tax-free dividend allowance of £2,000.
Tax on dividends or accumulation above £2,000:
|Basic rate||7.5%||£12,501 to £50,000|
|Higher rate||32.5%||£50,001 to £150,000|
James is paid £5,000 in dividends this will be taxed at:
First £2,000 – tax-free.
The £3,000 which exceeds the tax-free allowance will be charged at 32.5% = £975.
Total tax charge = £4,375
1. Selling investments before you become a tax-resident in the UK
By selling your investments in the tax year before you become UK tax-resident, you are realising the gain in a tax-free environment.
Issues: Selling your investments can be complicated and time constraints can cause you to have to sell at an inopportune time when markets have dropped. You may also not wish to sell your investments.
2. Sell investments abroad & repurchasing them once back in the UK
Issues: You will face the same issues as listed above. You will also have no tax-protection on your dividends and eventual capital gains when you eventually sell the investments in the UK.
3. Use a portfolio bond
By setting up a portfolio bond whilst living overseas you can mitigate capital gains tax and dividend tax upon your return to the UK.
A portfolio bond is a tax-efficient wrapper which allows you to take your investments home with you and pay no dividend or capital gains tax.
To learn more about how portfolio bonds can protect your wealth click here.
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