In this non resident investment guide we give you the key information you need to get investing.
Investing from overseas isn’t as complicated as it once was.
Investment platforms that value overseas business and the house buying process moving online means it’s easy for just about anybody these days to grow their wealth.
In this guide we’ll take a look at some of the more common investment options for non residents. We’ll pick our favourites and we’ll look at a few types of tax you may have to pay on your non resident investments.
The main non resident investment options
The most common investment options available are:
- Offshore bonds
- Structured notes
- QROPS
- Stocks
- Bonds
- REITS
- Investment funds
- Property
It’s worth pointing out before we go on, that there are some relatively common investment assets such as crowdfunding platforms that aren’t on the list. That’s because these aren’t usually available to non residents.
Offshore bonds and structured notes
Right off the bat, I’m going to discount the first two. That’s because unless you are very confident in your provider and totally understand this type of investment you are probably better staying clear of offshore bonds or structured notes.
I’m sure some people have made money through this type of product, but others haven’t and some have lost money. I dare say a lot of money in a more than a few cases.
Both of these can come with high risk, so unless you are a seasoned sophisticated investor avoidance is probably going to be your best policy.
QROPS
QROPS which is a non resident pension vehicle could be an option for you if you already have a UK pension. We’ve talked a little more about those here if that’s you. But for most they won’t be an option or at least an option you should choose.
Stocks
Stocks or what we often refer to in the UK as shares are ownership stakes of businesses. Essentially, when you buy a share you get a tiny piece of that business, and in doing so a tiny share of any profits or company growth.
Historic returns for US and UK shares has been around 10% per annum. The chances are this is going to be one of the best returns you are going to get in investing.
Whilst they make an excellent investment for most people. There’s a large caveat. They need to be part of a fund rather than an individual share.
Stocks as a whole are volatile. Individual stocks are volatile with bells on! Everyday some stock out there looses 90% of its value.
There are books and articles galore detailing research that shows most investors lose money when they attempt to invest in individual shares. And in fact, 9 out 10 professionals make a hash of it too. (You may want to take a trip over to S&P Global if you don’t believe me).
Individual companies are subject to all kinds of threats that even the most savvy investors can’t know. Government legislation, natural disasters, technological disruption, pandemics.
When you invest in lots of stocks within a fund, the impact of companies loosing money, is more than made up for by those that end up making loads of money.
The bottom line being, stocks are great but only as part of an investment fund where you invest in lots of them simultaneously.
Bonds
Bonds are a loan to a company or government. You lend them money. They agree to pay you back at a certain date and offer interest as a sweetener.
They don’t offer the same kind of returns that stocks do, but they do usually offer a return greater than what you get in a savings account.
They aren’t as volatile as stocks either but there are three risks to be aware of:
- 1 The risk of not getting your money back
- 2 Interest rate risk
- 3 Currency risk
Basically, the more chance you have of getting your money back the lower the interest rate you are likely to receive. The longer the duration of the bond the higher the interest rate but the potential to loose money increases.
And bonds come in all different currencies. Say you invest in a bond denominated in dollars, but you spend money in pounds. If the dollar weakens against the pound you essentially loose money.
You can read more about this here, but suffice to say the safest bond investments for British investors are usually going to be short term UK government bonds.
For non residents it depends whether or not they intend to retire in the UK. You can read more about that here.
Like stocks, bonds are best bought as part of an investment fund.
REITS
Real Estate Investment Trusts (REITs) hold companies that in turn hold lots of different kinds of property. Essentially, they rent out the property and give you a share of the rent. You get some of the benefits of property investment without the major drawbacks. No plumber needed in the middle of the night with these.
You can read more about them here, but in short they have similar returns and volatility to stocks. And like both stocks and bonds, most investors will do better investing in a fund.
Investment Funds
There many different types of investment funds. And though it’s not really this simple, I’m going to group them into two. Actively managed and index tracking.
Actively managed funds have a fund manager in charge who makes decisions in attempt to outperform a particular benchmark.
Index tracking funds simply track the benchmark. They don’t need a fund manager.
For a whole host of reasons, some of which we’ll come to later, index tracking funds are likely to be the best bet for most people.
You’ll often hear the term index funds, and while these are a type of index tracking fund. There is another one and that’s index tracking exchange traded funds (ETFs).
N.B. ETFs can be both actively managed and index tracking.
As standard index funds are not often available to non residents, index tracking ETFs, make an excellent alternative.
We’ve gone into a lot more detail about index funds here or if you aren’t quite sure of the difference between ETFs and index funds you might want to read this.
Here’s a quick summary of why index tracking ETFs make great non resident investments:
Tax Efficiency
Non residents don’t usually have access to the traditional tax shields you have back home such as ISAs and SIPPs, so products that minimise taxes are welcomed with open arms.
The way that index funds work more generally helps to lower the tax liability within the funds, but index tracking ETFs come with a number of further tax benefits. The first being Authorised Participants (APs). Now you don’t need to understand what these are. Just know, they help to lower the tax you pay favourably compared to all other types of investment funds.
Another big bonus is the fact they are traded on stock exchanges meaning they don’t generate capital gains events.
Availability
As mentioned above one you move abroad you can quickly find you don’t have access to a whole range of products and services that you took for granted back home. Nowhere is this more true than within the realm of finance and investing.
But just about anybody with access to an investment platform will be able to invest in ETFs.
Diversification
Often described as ‘the only free lunch’ in investing because diversification lowers risk and improves investment returns simultaneously.
It’s quite easy to find ETFs containing the shares of thousands of companies doing business all over the world. When you invest in so many companies you are investing in global business. As long as global business grows so too will your investments.
Compare that to buying shares in a single company. Who knows what is around the corner for even the best companies. Government legislation, wars, new technology and the like can all put the kibosh on once indestructible profit making machines.
And compare that to buying an investment property on one street, in one district, in one city, in one country, where the number of things that can go wrong is infinite.
Investment performance
Though it’s counter intuitive, funds that track indices tend to do better than those that are run by fund managers. In fact sticking with the index is likely to lead to investment results that are superior to 90% of professionals. (As already said, take a trip over to S&P Global and check out their SPIVA research if you don’t believe me.)
Low fees
Funds that track an index don’t need to pay the salaries of a management team, or spend an arm and a leg on marketing. These are costs that actively managed funds pass on to their investors. No wonder most of them underperform!
Funds that track indices are often around three quarters cheaper than those that don’t.
Choosing ETFs
When thinking about what ETFs you should choose the key is to be as diversified as you can as efficiently as you can.
The tried and tested method for most British investors is going to be two funds as follows:
A globally diversified index tracking stock ETF
A UK government index tracking bond ETF
If you don’t want to retire back to the UK, UK Government bonds might not be the right choice for you. You can read more about this here.
Here’s a couple of ETFs you could choose as an example.
- For stocks – Vanguard FTSE All-World ETF (VWRL) OCF 0.22%
- For bonds – iShares UK Gilts 0-5yr UCITS ETF (IGLS) OCF 0.07%
The percentage figure is the ongoing charges figure. Both are low.
How much money you allocate to each is an important decision that’s worth reading up on. You can start here if you are interested.
Why you don’t need a REIT ETF
We’ve written a complete article on this topic here. However, the headline is that big globally diversified stock ETFs like Vanguard FTSE All-World contain all the property exposure you are ever going to need already.
In fact, they’ll contain all the same companies you find a REIT ETF anyway. Yes, you may have a little less exposure to those same companies as you would if you invested in a dedicated REIT ETF but a lot of the other companies in the fund will have property exposure anyway. Think offices, warehouses, factories and the like.
Property
Nine times out of ten index tracking ETFs will be the best vehicle to grow your wealth. However, as good as they are, they might not be perfect for everybody.
And the number one alternative is property, or more specifically buy to let.
I have to admit, most people, most of the time will probably generate higher returns through property investment, but you’ll have to work for your money.
Depending on exactly what you want out of your investments buy to let might just make sense for you.
We’ve gone into a lot more detail about buy to let for non residents here.
And we’ve compared it to index funds here.
But in summary, my take on it goes a little like this.
Funds and property are both great investments for expats, but one of them requires a lot more work than the other. Granted you might get higher returns but you’ll have things to do.
There’s no way around it. Even if you have fully managed serviced apartments you’ll still have things to do with property investment.
At the very least you’ll have to deal with letting agents, but more than likely you’ll have to handle a whole host of other tasks like maintenance issues, insurance and self assessment tax returns.
That said, no amount of persuasion is going to convince some people to invest in the stock market, because they simply don’t feel comfortable doing it.
At the same time, some people just like ‘bricks and mortar’ and are quite happy to do tasks related to it, that others like me would consider work.
If that’s you, then property might make sense for you.
How can I invest in property as a non resident?
If you are interested in purchasing UK property but haven’t done it before we’ve written about how you can do it here.
And we’ve summarised the steps specifically for non residents here.
How can I invest in stocks and shares if I live overseas?
To invest in stocks and shares or ETFs when you live overseas you just need to open an investment account.
We’ve looked at some good ones for non residents here.
Non resident tax
No matter whether you choose property or index tracking funds, you need to be aware of a few tax issues.
Let’s face it, taxes can get complicated quickly. In this section we’ll go through the key types of tax non residents are likely to encounter.
Income tax
Salaries, dividends, interest on savings and rental income are all subject to income tax.
Whilst most non residents won’t be receiving a UK salary, most will receive at least one if not all of the other three. We are going to cover each of these in a little more detail later on.
The good new is anybody with a UK passport should be eligible for the personal allowance of £12,570.
This means you only pay tax on income above that amount.
Income taxes
| Band | Taxable income | Rate of income taxes uk % |
| Personal allowance | Up to £12,570 | 0 |
| Basic rate | £12,571 to £50,270 | 20 |
| Higher rate | £50,271 to £150,000 | 40 |
| Additional rate | over £150,000 | 45 |
You’ll usually get the personal tax allowance if you fulfil one or more of the following criteria:
- Have a British Passport
- Are a British citizen
- Are a European Economic Area (EEA) citizen
- Worked for the UK government at any time during the tax year in question
- Your country of residence has a double-taxation agreement with the UK which enables you to receive the allowance
Capital gains tax (CGT)
The next big one is capital gains. UK residents are liable for CGT on shares and property.
However, not on their home. Only second properties/investment properties are subject to capital gains tax. If you were UK resident you wouldn’t pay if you sold your home.
On the other side of the coin, non residents don’t usually pay CGT when they sell shares, but they do usually pay when they sell property. Being a non resident it may be hard to argue you are selling your home under normal circumstances.
Capital gains tax on UK shares
It’s definitely worth reiterating that CGT for non residents is applicable to property only.
You don’t need to pay capital gains tax on shares as a non resident.
That said, if you were to return to the UK to live permanently within 5 years you would have to return any tax savings you’ve made to HMRC.
This means non residents only really need to think about CGT on index tracking ETFs if you plan on going back to the UK. This is because if you were it might make sense to sell any shares you have before you arrive. You could then buy them back when you got back home otherwise you’d be subject to the following depending on which income tax bracket (see above) you find yourself in.
Tax on selling shares in the UK
| Tax Band | Tax Rate |
| Basic | 10% |
| Higher rate | 20% |
The good news is there is a £12,300 allowance so you only pay on gains above this.
Non resident capital gains tax on property
Non resident capital gains tax on property is a different matter entirely. Investment properties, second properties, buy to lets and the like will be subject to CGT and it’s not always going to be easy to argue its your home your selling when you actually live abroad.
Capital gains tax on property
This is higher than for shares. You pay 18% CGT if you are a basic income tax rate payer and you pay 28% if you are higher income tax rate payer. Those that qualify (see above) usually pay above the personal CGT allowance of £12,300.
Dividend tax
If you have stocks and shares in your index tracking ETF that pay out dividends, which most do, these could be subject to tax.
There are two areas to think about here. Tax on the dividends you receive and tax that is levied before you even receive your dividend called withholding tax.
The first thing to say, is that UK tax on foreign dividends is not going to be applicable here as you are a non resident. HMRC is concerned with UK assets.
But as with capital gains, non residents don’t pay tax on UK dividends providing they don’t return to the UK within 5 years.
The good news is, non resident citizens (passport holders) should be eligible for the dividend allowance of £2,000 and even better the personal allowance of £12,570, meaning a UK non resident could receive £14,570 without paying tax anyway.
I’m sure it goes without saying that a couple could receive double that i.e. over £29K without having to pay dividend tax.
If you are in the fortunate position to earn more than your allowance these are the rates you pay.
Dividend tax rates
| Tax band | Tax rate on dividends over the allowance |
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
Tax on US stocks as a UK investor / Withholding tax
Just about everybody has US stocks in their portfolio. Whether that be individual stocks or as part of their funds. Most global funds have well over 50% of their holdings in the US for example.
And this is totally understandable because lets face it right now it seems like all the best companies are situated across the pond.
This raises a tax issue though. Believe it or not, not only are there US taxes for UK citizens, there are US taxes for UK non residents. In fact, anybody who invests in US securities may be subject to withholding tax.
Non-U.S. residents receive dividends after withholding taxes have been applied. This raises the possibility of paying UK tax on US shares that have already been taxed.
However, depending on where you live you may be able to claim a reduced rate of withholding under an income tax treaty. Without this you usually pay 30%.
Your investment platform will usually ask you to complete a valid Form W-8 and be able to tell you what withholding tax you are likely to pay.
In terms of European ETFs Ireland seems to come up trumps here as it has a double-taxation treaty with the US.
This treaty means most Irish domiciled ETFs receive dividends from US companies after only a 15% deduction for withholding tax. This is applicable no matter where you buy them from.
Which is great considering dividends from ETFs domiciled elsewhere (France, Luxembourg and the US itself) may be subject to a withholding tax of 30%.
How do you know where your ETF is domiciled?
ETFs come with a fact sheet, which you either see or download on the providers website. Some of these explicitly state where a fund is domiciled, others just give you an ISIN number. Those that begin IE are domiciled in Ireland.
As an example, the ISIN for iShares UK Gilts 0-5yr UCITS ETF (IGLS) OCF 0.07% is:
IE00B4WXJK79
Do I have to pay tax on dividends in an accumulating fund?
Many funds give you two options for receiving your dividends:
- distributing
- accumulating
Distributed dividends get paid into your investment account as cash, accumulated dividends get automatically reinvested into the fund.
Typically, if you need cash i.e. to live off you’d go for a distributing fund, but if you are simply growing your wealth an accumulating fund might make more sense.
So just before we move away from divided tax it’s worth just mentioning the fact that accumulating funds are treated in exactly the same way as distributing and in fact, if you think you maybe liable to pay dividend tax it sometimes make sense to choose a distributing fund because such funds make it much easier to track the actual dividends you receive.
Whilst it is possible to do so with accumulating funds, it takes a lot more work.
Where can I find help?
Though I’m confident the vast majority of non residents will be able to adopt a do-it-yourself approach, I’m also fully aware that this isn’t going to be the case for everyone. Sometimes a little help can be worth paying for.
If you need help with property taxes we have found UK Landlord Tax to be very knowledgeable and open to our questions, so would recommend them as your first contact. You can contact them directly with any questions you may have from here. We’ve also gone into detail about how to find your own online tax accountant here if you’d prefer to do that.
For anything else we’d recommend beginning your search with Unbiased. They offer a free financial advisor match-making service. In other words, they can pair you with financial advisors for free.
Essentially, Unbiased match you to advisors who are independent, regulated and qualified. And yes even though they are a UK site serving UK residents, they also offer dedicated expat financial advice. And the service couldn’t be easier to use. You key in some basic information (the 2nd question being are you a UK resident) and then they’ll get to work finding you a professional that should fulfil your requirements.
Non resident investment guide – the bottom line
Non resident investment isn’t as complicated as it once was.
Investment platforms and the house buying process moving online means it’s easy for just about anybody these days to grow their wealth.
If you aren’t afraid of a bit of hard work, then property might make sense for you.
For everyone else an index tracking ETF or two might be the best investment you can make.