(This article provides some general advice on whether or not it is worth placing your money in an offshore non-resident UK brokerage account. If you are just looking for a stock broker open to non residents we’ve compared the most popular ones here. )
As a British expat it won’t take long before you’re told that you should keep your money offshore, especially investments in stocks and shares. Many people think a non-resident UK brokerage account needs to be an offshore account, but is that really the case?
The bottom line being, for most people, most of the time you don’t need an ‘offshore account.’
Just to be clear by offshore account we are talking about brokerages in so called tax havens.
Why you your account needs to be offshore?
I’ve heard a few different arguments for this but only two seem convincing. The first is that it is better to have your money offshore in case something bad happens in either the country you are living in or your country of birth.
Whilst I understand the argument for spreading your bets, I think the very nature of being an expat means you are at least spreading your bets across two countries, which is a lot better than most.
The majority of people live, work, and invest in their country of birth because they will always live there. They effectively throw all their eggs in one basket and as a result, could be hit hard if there was ever a major economic downturn in that country.
Most UK non residents aren’t doing that anyway, but if you are, there are plenty of brokerages located throughout the world. You don’t have to choose one located in a tax heaven.
Tax
The second and more convincing argument for having a non-resident UK brokerage account is that you can legally pay less taxes.
Taxes can add up and make a serious dent in your investments, so it is no wonder we are forever hearing about rich people and big companies moving offshore. However, just because it is right for them doesn’t necessarily mean it is right for all.
So there are a couple of points to make here.
- Tax heavens don’t heaven tax like the old days
- A lot of UK non residents won’t pay as much tax as they think they will
Tax heavens back in the day
Back in the day, you could simply stick your money in a brokerage located in an offshore location and say good by to tax. Both UK or otherwise.
However, those days have long gone. Yes, sure there are still ways and means of reducing taxes, but usually you need to change either your residence or the residence of your business to the actual location in question.
Some people do that. For them it is worth it, but for you it may not be.
If you are in a position to move we’ve gone into a bit more detail about low tax destinations here.
For most people, however, moving somewhere to avoid tax isn’t possible, but that doesn’t mean you have to pay hefty taxes to HMRC. Most people don’t.
UK non residents tax liabilities
The big two taxes for investments are capital gains on share price increases and income from dividends.
Capital Gains Tax (CGT) for shares works pretty much the same way as it does for houses. If you sell them for more than you buy them for you may need to pay tax on the difference.
Dividend tax works like income tax. If you get income from your investments you need to pay tax on it.
Avoiding taxes seems like a good reason to keep your money offshore. But do you really need to?
The good news for British expats is you don’t pay tax on capital gains on shares if you are not resident, so you don’t pay tax when you sell your shares anyway. This is a massive advantage over buy to let property investment for example.
For income tax, the situation is not quite so good because you usually have to pay tax on your UK income even if you’re not a UK resident. But there are a couple of reasons why this isn’t as big an issue as you might think.
- Non resident British passport holders are still eligible for the personal allowance. At the time of writing that’s over £12K per person (not to mention a separate dividend allowance).
- After 5 years of living overseas you don’t pay tax on dividends anyway.
Are you really non-resident anyway?
Whether you are liable for Capital Gains Tax depends on your residential status. You are definitely not a UK resident if you have lived and worked in another country for 5 years continuously. Up to then it will depend on exactly what your situation is.
The UK government has a guide that you can use to determine recidency called the Statutory Residence Test (SRT) / form RDR3.
Even if you were classed as resident its not all bad. It means the facilities and services that are open to British residents should be available to you.
SIPPs and ISAs let you grow your wealth tax free, for example.
Why you may not want or need an offshore brokerage
We’ve already established that the good old days of tax sheltering have gone, and that you may not pay as much tax as you think. But there are a couple more reasons to avoid offshore brokerage accounts.
- Risk
- Cost
Real offshore brokerage accounts don’t tend to be household names. You need to be sure you are putting your money somewhere safe.
And even if you do find one you can trust, it is unlikely they’ll come without hefty fees. Unless, for some reason, you have very high tax liabilities the fees could damage your investment returns more than taxes.
Non-resident UK brokerage account – offshore – the bottom line
Offshore sounds good, but it comes with risk and expense so you need to be sure you need it. Nine times out of ten, you won’t.