If you are Non-UK domiciled and have not been resident in the UK for too long (less than seven years) you may not need to worry too much about the UK taxation of your non-UK investments. You can legally ignore these (provided that this income is not remitted to the UK) by claiming the “Remittance Basis” of taxation.

The Remittance Basis – a non-domicile in the UK has the option of reporting their worldwide income and gains as it arises, known as the Arising Basis, or only reporting their foreign income and gains when they are remitted to the UK, known as the Remittance Basis. This does come at a cost; the individual will lose their entitlement to the personal tax-free allowance and they will be required to pay a remittance basis charge after their 7th year of UK residence. Another perk of being non-UK domiciled is the ability to claim Overseas Workday Relief (subject to certain criteria). 

However, after 7 years of UK residence the Remittance Basis can become a lot more expensive, initially requiring payment of the £30,000 remittance basis charge or paying UK tax on your foreign investments. Therefore, if you are approaching your 8th tax year of UK residence, you should consider the tax efficiency of your worldwide investments before they become potentially subject to UK tax.

Alternatively, you could be a UK domiciled investor, in which case you should be aware of the potential tax implications of certain non-UK investments. Please note, this is not investment advice but merely provides a brief description of the tax consequences of certain foreign investments.

The investments in question are collective investment arrangements (funds/units/trusts) that are more commonly known as “Non-Reporting Funds” (NRF). There are non-UK funds that have “Reporting” status agreed with HMRC and which do not carry the punitive tax treatment of the “Non-Reporting” variety. These “Reporting” funds are published by HMRC on their List of Approved Funds. Offshore funds that do not appear on this list are Non-Reporting Funds.

Tax Treatment

The treatment of the two types of fund are as follows;

Reporting funds – Favorable tax treatment 

  • Capital losses are available to offset capital gains
  • The net gain is reduced by the annual exemption (currently £12,300 (2022/23))
  • Any residual gain is subject to capital gains tax rates (10%, or 20% if a higher rate taxpayer).

Non-Reporting funds – Punitive tax treatment

  • Capital gains and losses must be separated. The gains are treated as “ordinary gains” and losses remain as capital losses and they cannot offset one another.
  • The annual exemption cannot be used to reduce the ordinary gain.
  • The ordinary gains are subject to income tax rates (up to 45% if you are an additional rate taxpayer)

All of this can have a dramatic effect, certainly if you have made a series of losses and are looking for some reprieve by offsetting your gains.

In our experience, these are most common where you have recently arrived in the UK and have a non-UK brokerage account. As described above, you can initially claim the Remittance Basis for your first seven years of UK residence. Once you are at the 8th tax year of UK residence, you must make a choice to report your worldwide income and gains on the “Arising Basis” or pay a £30,000 remittance basis charge for the pleasure of continuing to claim the Remittance Basis. In most cases it makes sense to start reporting your non-UK income and gains. It is at this point you realise that you could be stung with a big tax bill if you sell your non-UK collective investment funds.

So, if you’re an investor approaching your 8th tax year of UK residence and you are adamant that non-UK collective investment funds are the best option for you, then you may benefit from looking at the List of Approved Funds to make your investments as tax efficient as possible.

If you would like to discuss this further, please do not hesitate to contact one of our tax consultants for more information.