Dividend tax raid: what can expats do?
With a new tax on company dividends coming into force from April 2016, a financial planner explains how Britons overseas will be affected, and what steps they should take
Investors who receive more than £5,000 from company dividends held outside tax-efficient plans such as Isas will pay more tax from next April, thanks to plans announced by Chancellor George Osborne earlier this year.
For dividend income above this allowance, basic-rate taxpayers will pay 7.5pc, while higher-rate taxpayers will pay 32.5pc tax and those who pay the additional rate of 45pc will face 38.1pc tax.
Who will be affected?
Expat investors with large share portfolios outside of Isas and pensions could unwittingly be caught by the changes. In a world of low interest rates, many expat Britons have invested in blue-chip companies to supplement their income due to eye-catching dividend yields.
Many British expats have share portfolios which they set up with UK banks or stockbrokers before they left the UK or while they were abroad due to the more familiar regulatory regime back home. Typically, these investors have fallen into the non-tax payer or basic-rate payer brackets and, as a result, have not had to pay any further tax on their dividend income in the past. Such investors could now become liable to income tax on dividends or have to pay more tax than before.
Who will have to pay more tax?
Not all investors will have to pay more. The Government says that ordinary investors with modest dividend income from company shares will see no change in their tax liability, and some will pay less tax. For example, higher rate payers with £5,000 or less in dividend income will actually benefit from this change, but among British expats, this group will be a minority.
“Expat investors with large share portfolios outside of Isas and pensions could unwittingly be caught by the changes”
What action can you take?
Investors who are resident in the UK are scrambling to move their share portfolios into Isas so dividends can be withdrawn tax-free; however, this Isa option isn’t open to expatriates. Instead, there are a number of steps which they can take to mitigate their tax bill:
- Married couples and registered civil partners: Divide your portfolios between the two of you to make full use of each individual’s £5,000 allowance. Transfers between spouses and registered civil partners are exempt from capital gains tax, so no tax liability should arise when doing this. If one partner has a higher amount of UK-derived income, for example from pension income, align your portfolio so that taxable dividends are in the name of the spouse who has the lowest tax liability.
- Look offshore: Holding your shares in an offshore investment account in a low-tax jurisdiction rather than an equivalent UK account would mean that dividends are received gross with no further UK tax liability. Make sure to check the regulatory regime and financial strength of the provider though, as not all jurisdictions will have a comparative compensation scheme to the UK if your investment account provider goes bust.
- Offshore tax wrappers: UK dividends within an offshore bond would be received gross. Offshore bond investors only become liable to tax when profits are withdrawn, although withdrawals of up to 5pc of the original investment can be withdrawn each year without an immediate tax charge until 100pc of the original capital is withdrawn. This could allow a greater amount of flexibility around timing of income withdrawals and in turn, greater control around an individual’s liability to income tax. Offshore bonds are heavily marketed to expat investors by offshore advisers who can receive significant commissions when setting these up, so ensure you understand the charges, any commission payable to the adviser and how much receiving advice will cost you. Another important point to note is that if you return to the UK with individual shares rather than funds in your offshore bond, you may also suffer an additional tax charge on ‘deemed gains’. Setting up an offshore bond can be a complex process and may not be suitable for all, so seek professional advice from a qualified, regulated adviser.
