Most British expats are wrong about the taxes they’ll pay after moving back to Britain
Paul McCartney (no, not the musician) figured moving to Dubai was his ticket to ride.
He worked for 25.5 different tech companies in the UAE over a 13-year span.
“It’s a generational thing,” he told his father, who spent his career working at Boots.
Paul’s investment strategy was a bit helter skelter… until he read a quirky investment book.
He then invested his money in a diversified portfolio of index funds.
After 13 years abroad, Paul built a £2 million portfolio.
He then plans to move into a house in London, on Abbey Road.
But he wonders how his portfolio would be taxed after moving back to the UK.
To many British expats, the tax man is Voldemort.
Fortunately, Paul didn’t have to pay capital gains taxes on his portfolio’s growth while he lived in the UAE.
HM Revenue & Customs can’t tax any of the growth he made abroad, assuming he repatriates those assets properly.
Before moving back, he needs to liquidate his portfolio before becoming a UK tax resident (consult with a qualified accountant and expat-focussed Chartered Financial Planner to make sure you get this right).
Assume Paul does this and transfers his £2 million to Britain.
He then invests it in a globally diversified portfolio of index funds.
To shed the darkest shadow over Voldemort, let’s assume all of Paul’s £2 million is now in a fully taxable, UK-based account.
He decides to withdraw an inflation-adjusted 4 percent per year.
That should ensure that he doesn’t run out of money for at least 30 years… perhaps even longer.
Assume his portfolio gains 8 percent in his first fully taxable year.
A small portion of that growth would come from dividends, which would be taxable, and the majority would come from capital gains.
For the sake of simplicity (and to explain capital gains taxes) let's assume all of that growth was from capital gains.
That would represent a gain of £160,000.
It’s now worth £2,160,000.
If his portfolio were invested with a private money manager who traded individual shares on Paul’s account, he would pay some tax on that growth…. whether Paul sold anything that year or not.
But because Paul invests in a diversified portfolio of index funds, his money would grow, tax-deferred until he decides to sell.
If Paul withdrew 4 percent of his portfolio at the end of that first year, that would represent an £86,400 withdrawal.
You might assume his entire £86,400 withdrawal would be taxable.
But that’s not close to being true.
As far as the tax man is concerned, some of this money came from Paul’s initial investment deposit, which was made when he first moved back to the UK.
He can’t be taxed for withdrawing that money.
He can only be taxed on the part of that money which actually gained a realised profit.
In fact, Paul might pay as little as £40 in capital gains taxes after withdrawing £86,400 in his first taxable year back… assuming his portfolio gained 8 percent that year.
Let’s unpack that.
If Paul withdraws 4 percent of his overall portfolio, he has realised 4 percent of his overall gain.
That would be £6,400.
But Paul wouldn’t have to pay £6,400 in capital gains taxes.
For the 2023 tax year, HM Revenue & Customs says £6,000 of realised capital gains is fully-tax free.
Paul’s realised capital gain for the year was £6,400.
That means only £400 of his capital gain would be taxable.
If, after repatriating, Paul took a UK-based part-time job and his income, plus his realised capital gain, was less than £50,270 in a taxable year, he would pay just 10 percent tax on that £400 capital gain.
(Remember, in Paul’s case, he would have withdrawn £86,400 from his portfolio, but his realised capital gain was just £6,400).
This is why Paul could withdraw £86,400 in his first taxable year back and pay as little as £40 in capital gains taxes.
If his job plus his capital gain earned him more than £50,270 a year, he would pay 20 percent tax on that £400 capital gain.
This oversimplifies the process, of course.
Each person's tax bracket will be specific to their circumstance.
And over time, as Paul’s portfolio grows, capital gains will constitute a higher proportion of his total portfolio value.
As a result, he will pay higher taxes over time.
But the key point is this: only part of the Paul’s withdrawal from a taxable account would be taxable.
And in most cases, that capital gain will be taxed far lower than tax applied to people earning money from a job (the income tax rate).
That’s why I joke that the tax laws were created by the rich, to benefit the rich.
And with a financial adviser and tax accountant on Paul’s team, he could further maximise the efficiency of his money by employing other tax-advantaged opportunities.
This Paul McCartney might start singing after all.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.
Editor’s note: This blog was updated on February 10 March 2023 to reflect updated capital gains tax calculations. It was originally published on 28 February 2023.