How to maximise UK tax-free income using allowances and exemptions
Returning to the UK after a period overseas will involve planning; it often requires generating a suitable “income” strategy if it is for retirement.
The UK has a range of tax-efficient savings vehicles and allowances to generate a tax-efficient income. The basis of the repatriation plan for the returning expat is to utilise these local allowances as soon as possible after a period of working abroad.
The below tax allowances are available each year per person.
- Personal allowance—Shelter £12,500 of income from tax through personal allowances.
- Dividend allowance—Can each withdraw £2,000 of tax-free dividends.
- Savings allowance—£5,000 available if kept within the non-savings income levels.
- Capital gains tax annual exemption—£12,300 of capital gains exemptions drawn from a direct investment portfolio.
If the returning expat will be employed, further consideration is needed. An income of over £100,000 will reduce the personal allowance by £1 for £2 earned.
Tax Wrapper Withdrawal Options
- Tax-free ISA withdrawals – All withdrawals from an ISA portfolio are free of tax.
- Tax-efficient pension withdrawal strategy - On retirement, using a Flexi-access drawdown pension allows pension income to be varied or turned on and off, as needed. The use of this flexibility of income, when linked to the use of pension commencement lump sum, offers a very tax-efficient and flexible form of income. The pension is also Inheritance Tax-free.
- Offshore Bond withdrawals - Offshore bonds grow in a tax-deferred environment. By using a clever withdrawal plan, the income can remain within the tax-free limits.
- Tax-free VCT dividends – VCT dividends are entirely tax-free. It should also be noted that although VCTs are valuable tax-efficient investment vehicles (which offer tax relief on initial investment, tax-free dividends and tax-free capital gains potential). However, they are deemed to be higher-risk investments, which are suitable for individuals who have the appropriate capacity for loss to undertake such investments.
UK Repatriation Strategy
An income of £12,570 (in the tax year 2021/22) or £25,140 as a couple can be drawn each year with no liability to tax from assets, such as property and pensions.
Bed and Breakfast
Selling and buying the assets before becoming a UK tax resident ensures capital gains earned overseas are reset. The gains generated whilst a UK resident will be subject to capital gains tax.
Capital Gains Tax Allowance
£24,600 per year per couple can be withdrawn by utilising the CGT allowance. A portfolio of £500,000 in a jointly-owned direct portfolio would keep within the allowance levels selling 5% of the portfolio each year. It is worth noting that the portfolio needs to consider sequencing risk, and the asset will be subject to the IHT calculation.
Capital Gains Tax Rate
Drawing gains above the capital gains allowances are only subject to 10% capital gains tax (for a basic rate taxpayer). This is more efficient than taking income from a pension where the tax is at the marginal rate.
Bed and ISA
Transfer capital from a general investment account into an ISA to utilise the allowance each year. For instance, £400k is ten years of joint contributions.
As the ISA allowance is £20k per person per tax year and the tax year is April 6th to April 5th, depending on the return date, it could involve a couple contributing £80k in the initial calendar year of UK tax residency.
Holding direct shares/funds will allow dividends tax-free up to £2,000 each year per person and a further £1,000 each of interest. This gives an additional tax-free income of £6,000 per couple.
Offshore Bond gross roll-up and 5% withdrawals
Tax is deferred gross roll-up within the bond. Generate the tax-free income by withdrawing 5% each year. The bond can be considered a pension alternative (keep the pension to the last because of Inheritance tax options).
A returning expat couple can generate around £70,000 per year tax-free by using the allowances and even more using efficient withdrawal strategies. The income strategy remains flexible and adaptable to changing circumstances.
The information above is only suitable for certain nationalities. Please contact us for specific advice