How Non Doms Can Have a Tax Free Overseas Investment Portfolio

The tax rules make it unattractive for many non-doms to claim the remittance basis, especially those who are subject to the £30,000 charge. However, it's still possible to have a sizeable overseas investment portfolio and pay little or no tax in the UK. For example, let's say you have an overseas investment portfolio worth £200,000. A balanced portfolio would normally contain a mixture of:

Cash and bonds

Shares

Property You can still keep almost £50,000 in a bank account or other interest-earning assets such as bonds and not worry about the UK taxman. This assumes you earn 4% interest on your money. As long as you have less than £2,000 of unremitted interest you will not have to pay any UK tax. That would leave you with £150,000 to invest in other assets. Let's say you invest the remaining money equally in shares and property. The £75,000 you invest in shares will produce both capital gains and dividend income. You can avoid capital gains tax by simply holding onto your shares until you eventually leave the UK. Alternatively, you can sell some shares every year to take advantage of your annual CGT exemption, provided you don't also have gains from a share portfolio in the UK. In this example, even if the portfolio grows by 13% per year these gains will still be covered by your annual CGT exemption and can be remitted tax free to the UK. Gains over this amount will be taxed at 18% or 28%. Your dividend income may be taxable. If you're a basic-rate taxpayer there will be no further UK tax payable but if you're a higher-rate taxpayer the tax is just 25%, provided you own less than 10% of the shares in the overseas company. However, this problem can be mitigated and possibly avoided altogether by investing in companies that focus on capital growth and pay very low dividends. The final £75,000 could be used to invest in overseas property. In some countries, including many emerging market hotspots, you can buy a whole property for that amount. Alternatively you could use it as a deposit and borrow the rest. How the property is taxed will depend on how it is used. If it's used exclusively as your personal holiday home there won't be any rental income so you won't have to worry about UK income tax. Furthermore, second homes qualify for extremely favourable capital gains tax treatment. If the property is purely an investment then there will be income tax on any rental profits and capital gains tax when you sell. Capital gains tax can be avoided by simply not selling your properties until you become non-resident. However, to keep under the £2,000 exemption limit you may have to remit your rental profits and pay up to (usually) 40% tax. One way of avoiding income tax on your rental profits is to make sure you don't earn any profits. For example, instead of buying one property outright you could buy two or three by taking out mortgages and claiming the interest as a tax deduction. This is a more risky strategy but you'll enjoy capital growth on a bigger chunk of property. Gearing up your property investments in this way allows you to convert taxable rental income into capital gains that are partially or totally tax free. In summary, the new rules for non-doms can be onerous but it is still possible to invest in a mixture of cash, shares and property and pay little or no UK tax from year to year.