British Expat Tax – What you need to know

Tax can be somewhat of a minefield at the best of times. Whilst this may not come as any surprise if you are reading this, I’m going to say it anyway. It’s nearly always worse for expats.

But don’t worry. This guide has you covered.

It is by no means a one stop shop, but I think it covers the main taxes British expats need to pay to HMRC.

1. Property

Stamp Duty

UK property tax starts with stamp duty. You need to pay this when you buy a property. Here are the rates taken straight from the UK governments website and if you already have a property (in the UK or abroad) you’ll pay an additional 3% on the rates below.

Property Value	Rate
Up to £125,000	0%
The next £125,000 (the portion from £125,001 to £250,000)	2%
The next £675,000 (the portion from £250,001 to £925,000)	5%
The next £575,000 (the portion from £925,001 to £1.5 million)	10%
The remaining amount (the portion above £1.5 million)	12%

Income Tax

Rental income is subject to income tax. There’s a personal allowance of £12,500. Above that rate you pay tax.

Tax Band	Taxable income	Tax Rate
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

You must pay tax on gains you make on UK residential property on amounts greater than your tax allowance. This applies even if you’re an expat. Your allowance is £3,000.

Though Capital Gains Tax (CGT) is completely separate to Income Tax, it is related in one way. The amount of Capital Gains Tax you pay depends on the income tax band you are in.

You pay 18% CGT if you are a basic income tax rate payer. You pay 28% if you are higher income tax rate payer. (This will be reduced to 24% soon). Looking at the income tax table above, you can see that you’d need to have a UK income over £50,000 before you would be liable for 28% CGT.

If you were to come back to the UK and live in your property for a period of time before you sold it you might not have to pay as much capital gains tax.

2. Exchange Traded Funds (ETFs)

Stamp Duty

Firstly a bit of good news. Unlike buy to let and individual shares, you don’t pay stamp duty on ETFs.

Reporting or Distributor Status

It is important that your ETF is ‘reporting or ‘distributor’ status. Such status means an ETF’s gains are subject to capital gains tax rather than the more expensive income tax. Most of the big providers’ ETFs have this status but its worth confirming this.

Domicile and US Withholding Tax

Most European ETFs are domiciled in either Ireland or Luxembourg. However, they often hold lots of US shares, so they require a Tax Treaty with the US. Some countries tax treaties are better than others.

For example, Ireland has a double-taxation treaty with the US. This allows most Irish domiciled ETFs to receive dividends from US companies after a 15% deduction for withholding tax. Other countries may charge more. Dividends from ETFs domiciled in France, Luxembourg and the US may be subject to a withholding tax of 30%.

Country Exchange

US estate tax laws are a complex business. However, it is my understanding that if you purchase US ETFs from a US exchange you may be liable to pay U.S. estate taxes. This applies whether you are American or not.

Further, it gets worse! If you’re not American the starting balance for which this tax kicks in is much lower. No matter where you are from, an expat with holdings of over $60,000 in US ETFs may come under US estate tax law. Whoever you leave your money to, could be taxed between 18 and 40%.

The good news is, that if you are buying off non-American exchanges such as the London Stock Exchange you shouldn’t have that problem. These days many brokers let investors make purchases off lots of different exchanges.

The cheaper fees often tempt them into buying off US exchanges. This could be a big mistake. The bottom line is, unless your investments are small or unless you know something contrary to what’s written here, it is probably better to avoid buying from US exchanges.

Dividends and interest

ETFs of stocks usually pay dividends.

As soon as you become a non resident you can receive dividends on UK assets tax free. However, be warned if you were to return to the UK within 5 years you’d have to pay any tax savings made back to HMRC.

At the time of writing there is a dividend allowance of £2,000 so you would pay tax on any amount above that. A basic rate tax payer pays 7.5% and a higher rate tax payer pays 32.5%.

Bond ETFs pay interest. You don’t pay any tax on savings income up to £5,000 if your total other UK income is less than £17,500. If your UK income is over that amount there’s a personal savings allowance. Basic rate tax payers have a £1,000 tax free allowance and higher rate tax payers have a £500 tax allowance.

It is worth pointing out that your personal income tax allowance can also be used alongside the dividend and savings allowance.

Capital Gains tax

You don’t pay Capital Gains Tax on UK assets that are not property unless you return to the UK within 5 years of leaving. As a result, long term expats don’t have to worry about capital gains on their ETFs.

If you return to the UK within 5 years, however, you would pay it just like UK residents do. The amount you pay is less than for property. It is 10% for basic income tax rate payers and 20% for higher rate payers.

A few points to remember

British expats are still eligible for the personal allowance.

It’s probably safest to buy ETFs with Reporting or Distributor Status that are domiciled in Ireland

The fact that expats don’t pay capital gains tax on ETFs is important. It suggests that unless you have millions of pounds or a property portfolio the tax you pay is unlikely to be as important as other factors.  How much you actually invest and the expense ratio / ongoing charges of the funds you actually buy are likely to be more important.

Tax laws are constantly being updated, so all the above is subject to change.