Chancellor George Osborne is set to grab millions in tax from investors paid dividends outside of tax wrappers such as ISAs and pensions.
From April 6, 2017, the old dividend tax system is scrapped and replaced with a new set of rules.
Everyone will have a £5,000 dividend allowance – and once that limit is breached by dividends paid outside of tax wrappers, income tax is due on the amount received.
Basic rate taxpayers will pay at the new rate of 7.5%. Previously they paid no income tax on dividends as the company they owned shares in handed the money directly to HM Revenue & Customs (HMRC) and they were credited with the cash.
Who pays dividend tax?
Higher and additional rate taxpayers also have the allowance, and will pay extra income tax at 32.5% and 38.1%.
Any expats who have direct investments in UK shares that are unprotected by tax wrappers are affected.
Everyone earning more than £5,000 in dividends will pay extra tax.
Only higher and additional rate taxpayers paid dividends below the £5,000 threshold will pay less tax than before.
Many UK shareholders are moving their share portfolios into ISAs, but this is not a solution for expats. Although expats may have held an ISA before leaving the UK and may still do so, they do not receive the tax benefits in the same way as a UK taxpayer.
Three solutions for expats
This leaves three measures to look at for expats to reduce the tax they pay on dividends from April 2016:
Split shareholdings – If the share portfolios are held in one name by a married couple or civil partners, they can shift the shares around to make sure they make best use of each other’s £5,000 allowance.
If one spouse pays tax at the basic rate and another at the highest rate, then stack the spouse who pays income tax at the lowest rate with shares first – once both pay higher rate tax, just split the portfolio 50:50
Tax rules allow spouses to transfer their shares between each other without triggering capital gains tax.
Offshore solutions – Moving investments to a low tax financial centre may help, but check with the regulator that the investment is protected by a financial compensation scheme
Look at an offshore bond – Bonds are tax wrappers that defer any tax until an income is withdrawn and 5% of the value of the bond can be taken each tax year without triggering any tax.
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