Thinking about tax on investments within the UK is one thing, but for anyone who has foreign investments and income and wants to bring that money into the UK, there are many things to consider.
Let’s explore who pays tax on foreign income and then we’ll explore 3 strategies to save on that tax bill on foreign income.
High level (very simplified) summary on what tax is due is:
- If you earn in the UK, you will need to pay tax in the UK regardless of whether you are a UK resident or not.
- If you earn abroad, then you will only need to pay if you are a UK resident.
- You’re a UK resident if you spend most of your time in the UK and live here, and you’re not if you don’t.
High level summary of 3 tax-saving techniques when repatriating gains are:
- EIS Scheme investments
- Keep the money abroad
N.B. We are not tax advisors and do your own research as ever.
UK and Foreign Income Tax Guidance
Are you a resident or not?
It’s important to first consider whether you are a ‘resident’ in the UK or not, a lot of the taxation rules depend on it.
You’re a resident if:
- You spent 183 days or more in the UK in the tax year.
- Your only home was in the UK – you must have owned, rented, or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year.
You’re automatically considered a non-resident if:
- You spent fewer than 16 days in the UK (or 46 days if you have not been classed as UK resident for the 3 previous tax years).
- You work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working.
You might not fit perfectly into these categories in which case you fall under ‘split-year treatment’ rules where you pay tax on foreign income for the duration of your stay in the UK.
UK Income, UK tax
Sadly, UK income is normally taxed even if you are not a UK resident.
That means pensions, rental income, and wages that you earn in the UK even as a non-resident will still usually be taxed.
Additionally, your home country may also tax you on your UK income too – so check that.
UK tax on foreign income
Foreign income is any money earnt outside of England, Scotland, Wales, and Northern Ireland. You would only need to pay UK tax on foreign income if you are a UK resident. If you spent only a few days in the UK, or if you worked abroad full-time and only came back to the UK for the occasional visit, you shouldn’t have to pay any UK tax on your foreign income (providing you fit the non-resident definition above).
If you are a UK resident, you will pay tax on your foreign income.
This applies to:
- Wages if you work abroad.
- Income from pensions held overseas.
- Rental income on any overseas property.
- Income from foreign investments, for example dividends.
Saving on that tax bill
Let’s imagine you sold a foreign asset and have made a nice sum of profit. You immediately think to yourself: I am going to lose a good chunk of the profit to tax.
What can you do about that?
1. Reinvestment relief through EIS
The Enterprise Investment Scheme (EIS) is a government scheme that provides special tax reliefs for investing in start-ups and would essentially allow you to cancel out a lot of the tax implications when bringing money back into the UK.
When selling a foreign asset you can use the capital gains tax (CGT) reinvestment relief to reduce your subsequent tax bill.
If you sell a foreign asset and then invest those funds in an EIS eligible company in the UK, you will not have to immediately pay CGT. You will pay capital gains tax when you sell those EIS eligible company shares.
This works for any gains you made in the past 36 months or expect to make in the next 12 months. So, if you invested in an EIS eligible company on 31 March 2021 you can defer tax on gains generated from 1 April 2018 to 31 March 2022.
This tax relief continues for as long as you hold the qualifying ordinary shares of that EIS eligible company. Once you sell those shares, you will be liable to pay that original CGT (you don’t pay tax on any value gained due to the actual EIS investment).
But can we do anything about that eventual tax bill?
2. EIS income tax relief + reinvestment relief
You can claim up to 30% of the value of your investment in an EIS eligible company in the form of income tax relief. The maximum annual investment you can claim tax relief on is £1 million. So, for example, if you invested £100,000 you can save £30,000 in income tax.
If you combine this with the reinvestment relief, you’re making heavy savings.
Imagine you sold an asset and made £100,000 in gains.
You then invest that £100,00 into an EIS eligible company, you can defer up to 28% of the tax due on that (depending on your CGT rate). You can then claim that 30% income tax relief for a credit of £30,000.
The net immediate cost of that investment has just been reduced to £42,000! A saving of £58,000.
Even if you then sold those shares after the three-year threshold and had to pay the 28% CGT, the 30% income tax relief effectively cancels out that tax bill.
But there’s a way for you to minimise that deferred CGT completely.
3. Hopping from EIS to EIS
You might be thinking to yourself, what if I take the money out from the EIS after and reinvest it into another EIS? Technically that’s just a reinvestment, right?
That’s exactly right.
What this means is that you could just keep taking that original sum and investing it in EIS after EIS to keep rolling over the deferral, never paying that tax bill.
But what would you do eventually? Surely one day if not you then your next of kin who inherit it would need to pay that tax bill?
Good news on that front, there is no inheritance tax at all on your EIS pot provided it was held for at least two years.
4. Gift it to your spouse
If you gift your EIS shares to your spouse the CGT due would not be taken upon gifting and you are not liable for that tax. When your spouse then sells those shares, they would become liable to pay that deferred tax.
So let’s say we have our gains of £100,000 on our foreign asset and invested it into an EIS eligible company. We claim our £30,000 in income tax relief and that maximum figure of 28% CGT (£28,000) is deferred, so far so good.
You now gift that £100,000 worth of shares to your spouse, no CGT for you. But three years later and your spouse wants to sell those shares and the £28,000 is now due.
What happens now?
The capital gains tax-free allowance would mean your spouse can subtract £12,300 from the £28,000, leaving a reduced tax bill of £15,700.
Of course, you could just gift the asset to your spouse. You would not pay any CGT in this case. However, if your spouse then later decides to sell the asset, they would be liable to pay the CGT. Their gain will be calculated on the difference in value between when you first owned the asset and when they sold it.
You could also gift it to charity, in which case you would not pay any CGT.
5. Keep the money abroad
If you are what’s called ‘non-domiciled’, resident in the UK for a while but your permanent home is somewhere else, for example, then if you do not bring the money you made into the UK then you can claim a remittance basis so you do not pay tax on money not brought into the UK.
Depending on how long you plan to stay within the UK, this may not be viable so you would have to make a judgement based on your situation.
There are many ways to avoid that hefty tax bill as we’ve explored, from EIS to gifts. The benefit of the EIS route is, of course, that you are investing so you may realise even further gains due to your investment (or you may not!).
If you want to get started on EIS investing, you need look no further than our very own ifg.vc, an ethical start-up investing hub, trusted by over a thousand people, where you can invest your capital in a sensible manner to receive competitive gains, and save on that tax bill at the same time.
 Double-taxation agreements don’t include the sale of any residential property within the UK.