Offshore Income Gains
In much the same way as the US has the Passive Foreign Investment Company (PFIC) regime to disincentivize investment in non-US mutual funds, the UK has the Offshore Income Gain (OIG) regime. Investment into foreign (non-UK) funds which are not HMRC approved offshore reporting funds are subject to penal tax measures from a UK tax perspective - any capital gains made upon the sale of these assets are taxed at ordinary income rates, rather than the lower capital gains rates. The UK capital gains annual exemption cannot be used against OIGs, nor can capital losses from other investments in the same way that would be available for regular capital gains. The end result can be that, even if there is an overall loss in an investment portfolio, substantial tax may be owed on these OIGs.
Offshore Income Gains FAQs
Q: How do I know if I have an OIG?
As a general rule, investments made via UK brokerage companies will be into assets with the United Kingdom as their country of domicile. Therefore, it is usually only if investments have been made through foreign providers that such investments are at risk of giving rise to an OIG. A typical case would be a US person who has moved to the UK but retains their US brokerage account. It is important to note that the OIG regime applies to funds only, so if you hold individual shares in a company e.g Apple, these are not subject to the punitive OIG tax treatment. In the first instance you should cross-check your investments with the most recent HMRC approved offshore reporting fund database, which can be searched by name, CUSIP and ISIN amongst other unique fund identifiers.
Q: I hold a number of foreign funds which are not on HMRC’s list of approved offshore reporting funds, will I incur a large tax charge?
Firstly, a tax charge will only arise at the point of disposal of the asset, and secondly, only if a gain has been made. Simply holding such assets will not incur any tax in and of itself, and if a loss is made these are treated along with regular capital losses and can be used to offset regular capital gains. When you come to sell the asset, if a gain has been made, this will be subject to tax at your ordinary income rate, and you should consult your tax advisor as to the best way to dispose of the asset to incur minimal tax (it may be that disposing of a holding over a number of years is a better option, if it means that you are taxed at a lower marginal rate).
Q: I have no other income, can I cover my OIGs with my personal allowance?
Yes. In fact, in certain rare circumstances, having a mixture of capital gains and OIGS can be more beneficial to a taxpayer than the corresponding amount of capital gains. For example, if a UK tax resident has £10,000 of OIGs and £10,000 of capital gains, and no other income, they are able to cover their OIGs with their personal allowance (currently £12,570) and their capital gains with their annual exemption (currently £12,300) resulting in no end tax liability; whereas £20,000 of capital gain would have resulted in a tax liability of £770. However, as a general rule, we would never encourage investing into such assets from a UK tax perspective, since for 99% of taxpayers the tax consequences are usually substantially negative (often the difference between being taxed at 45% vs 20%).
Q: Can I gift away my investments to a non-UK relative to avoid this OIG treatment?
No - unfortunately, for UK tax purposes, the gift would be a deemed disposal and therefore would give rise to a taxable event on the day the gift is made.
Q: Is there anything I can do to avoid this penal tax treatment?
As a general rule, if you hold non-HMRC approved funds in your portfolio, there is very little you can do once you are a UK resident to not fall foul of the OIG regime. If you do not intend to permanently reside the UK, one option would be to wait until you are no longer a UK tax resident and dispose of these assets then.
Offshore Income Gains FAQs
Q: How do I know if I have an OIG?
As a general rule, investments made via UK brokerage companies will be into assets with the United Kingdom as their country of domicile. Therefore, it is usually only if investments have been made through foreign providers that such investments are at risk of giving rise to an OIG. A typical case would be a US person who has moved to the UK but retains their US brokerage account. It is important to note that the OIG regime applies to funds only, so if you hold individual shares in a company e.g Apple, these are not subject to the punitive OIG tax treatment. In the first instance you should cross-check your investments with the most recent HMRC approved offshore reporting fund database, which can be searched by name, CUSIP and ISIN amongst other unique fund identifiers.
Q: I hold a number of foreign funds which are not on HMRC’s list of approved offshore reporting funds, will I incur a large tax charge?
Firstly, a tax charge will only arise at the point of disposal of the asset, and secondly, only if a gain has been made. Simply holding such assets will not incur any tax in and of itself, and if a loss is made these are treated along with regular capital losses and can be used to offset regular capital gains. When you come to sell the asset, if a gain has been made, this will be subject to tax at your ordinary income rate, and you should consult your tax advisor as to the best way to dispose of the asset to incur minimal tax (it may be that disposing of a holding over a number of years is a better option, if it means that you are taxed at a lower marginal rate).
Q: I have no other income, can I cover my OIGs with my personal allowance?
Yes. In fact, in certain rare circumstances, having a mixture of capital gains and OIGS can be more beneficial to a taxpayer than the corresponding amount of capital gains. For example, if a UK tax resident has £10,000 of OIGs and £10,000 of capital gains, and no other income, they are able to cover their OIGs with their personal allowance (currently £12,570) and their capital gains with their annual exemption (currently £12,300) resulting in no end tax liability; whereas £20,000 of capital gain would have resulted in a tax liability of £770. However, as a general rule, we would never encourage investing into such assets from a UK tax perspective, since for 99% of taxpayers the tax consequences are usually substantially negative (often the difference between being taxed at 45% vs 20%).
Q: Can I gift away my investments to a non-UK relative to avoid this OIG treatment?
No - unfortunately, for UK tax purposes, the gift would be a deemed disposal and therefore would give rise to a taxable event on the day the gift is made.
Q: Is there anything I can do to avoid this penal tax treatment?
As a general rule, if you hold non-HMRC approved funds in your portfolio, there is very little you can do once you are a UK resident to not fall foul of the OIG regime. If you do not intend to permanently reside the UK, one option would be to wait until you are no longer a UK tax resident and dispose of these assets then.
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