My daughter is now living, earning and paying tax in Australia, where she is likely to stay for a couple of years before returning to the UK. She is currently saving monthly from her Australian salary, but has just received a tidy nest egg, paid into her UK bank account, which needs investing. Is she still able to make use of any UK tax-free vehicles, such as an individual savings account (Isa)? What tax factors should she consider when saving or investing in Australia?
Seamus Murphy, senior personal tax manager at Taxback.com, says your daughter became “not resident and not ordinarily resident” (NRNOR) for UK tax purposes on the date of her departure.
Generally, she will be subject to UK tax on UK income but there are special provisions applying to interest, which should help her reduce her liability to UK income tax to zero while she is away. If your daughter completes form R105 and forwards it to her UK bank, this should allow the bank to pay her interest with no
UK tax deducted.
As she has no other UK sources of income, her liability to UK tax will, thanks to the completed form R105, be zero.
However, it is worth mentioning here that banks are not required to accept form R105, so she should check in advance whether her bank supports the facility.
If not, she may feel it is worthwhile using a different financial institution, or making a claim after the tax-year end to recover UK tax.
You specifically ask whether it is possible for your daughter to place her nest egg in an Isa. Unfortunately, while it is possible to maintain an Isa that was set up while she was resident and ordinarily resident (ROR), it is not possible for her, as a non-resident, to add to an Isa. As an alternative, your daughter may wish to consider investing in UK gilts or UK shares, both of which are free of tax for non-residents.
Consideration also needs to be given to her Australian tax position.
I assume your daughter has migrated to Australia on a 457 visa. As such, she should be within the scope of the Foreign Income Exemption for Temporary Residents (FIETR), which should put her non-Australian income outside the scope of Australian tax. She will, of course, remain taxable in Australia on her employment income. As a result, it should be possible for her to earn income on her nest egg free of both UK and Australian tax.
It is worth pointing out here that, in order to qualify for FIETR, there are specific requirements. If your daughter is outside of these requirements, she will be treated as a “normal” tax resident in Australia. In summary, this means she will have a tax-free threshold where she can earn up to $6,000 a year before tax is payable.
If and when your daughter does return to the UK, assuming there have been no changes to the law in the interim, there should be no issue from a UK tax perspective with her bringing savings accumulated while abroad back into the UK. Income tax is a tax on income, and her savings should constitute capital.
Of course, if she returns to the UK on a permanent basis, any income earned on the capital afterwards will be within the scope of UK tax, but that would be the case whether the savings were remitted to the UK or remained in Australia.