Financial considerations for Canadians living in the UK

In the last UK census, there were an estimated 82,000 Canadian born people living in the UK making it the third most popular place to live for Canadians after the USA and Hong Kong.

As with people of any nationality, Canadians living in the UK face a significant increase in the complexity of their financial matters, from their tax affairs to how they manage their investments to achieve their financial goals.

We have created this guide in associate with Scott Tindle from Tindle Wealth – a Canadian independent financial advisor who specialises in the financial affairs of Canadian expats living in the UK.

While this guide will provide Canadians with useful information, you should never make financial decisions without seeking professional advice.

Income, dividends and Capital Gains Taxes

Canadians living in the UK will typically be taxed by the UK tax authority, HMRC, on their worldwide income and gains – including those made in Canada on investments and property that are still in Canada. The Canadian government applies a withholding tax to some forms of income, like dividends and rent received on property.

Usually these withholding taxes can be offset against one’s UK tax liability so that, in effect, the net tax paid is equal to the usual UK tax rates. In other words, you shouldn’t have to pay extra tax on your Canadian investments simply because they are located in Canada.

It is, however, extremely important that the necessary filings are made with both the Canadian and UK tax authorities to ensure you pay the correct amount of tax without overpaying.

Inheritance Tax

The estate of Canadian who passes away when they are a resident of the UK is subject to Inheritance Tax (IHT) – typically 40% on estates worth more than £325,000.

Canada does not have an inheritance tax per se, but in Canada a capital gains tax is levied upon a person’s estate when they pass away – which is a similar sort of ‘death tax.’ Therefore, a Canadian living in the UK would not have to pay inheritance tax on any money they inherited from, say, a parent in Canada but the impact of the capital gains tax on that inheritance should be taken into account when planning for the future.

If a Canadian living in the UK were to pass away, then their estate would be subject to UK inheritance tax. There there are lots of legal ways to mitigate inheritance tax and, therefore, Canadians living in the UK, especially those that have amassed significant assets and/or are of an advanced age, should strongly consider obtaining relevant advice from a financial adviser.

UK Non-Domiciled Residents and the Remittance Basis of assessment

‘Domicile’ is a peculiar British legal term that refers to, roughly speaking, the country you consider to be ‘home’ rather than the one in which you are resident.

Someone who is not domiciled in the UK yet resides in the UK can elect to pay tax on a so-called ‘remittance’ basis. This allows the person to pay no UK tax on income and capital gains generated outside of the UK so long as they do not bring (or ‘remit’) those income/gains into the UK. This rule is a major reason why the UK is often considered a generous tax haven. 

Many Canadians take advantage of this rule by declaring themselves a ‘non dom’ and paying little or no tax on all the income and gains they generate outside of the UK. The investments used to generate the income/gains can be left in Canada or invested via low tax jurisdictions like Jersey.

This tax strategy can be very attractive so long as you can afford your lifestyle within Britain with the earnings/income you make in Britain (if necessary, you are able to bring overseas income/gains into Britain though they then become subject to UK tax, thus nullifying the tax benefit). There are also ways to generate, essentially, UK tax credits by bringing money into the country and investing it in certain small and medium size businesses (for example, those that qualify for the EIS tax incentive).

Anyone declaring themselves as a ‘Non-Dom’ and electing to be taxed on the remittance basis should be careful how they structure their offshore investments – especially if they intend to bring any money whatsoever into the UK. For example, it might be more tax efficient to, prior to declaring oneself subject to the remittance basis of tax, setup a segregated offshore cash reserve account so that the account can be used to fund transfers into the UK (if and when such transfers are necessary).

This would make it clear to HMRC that the money being remitted is not from income or a gain and that it should therefore not be subject to UK tax.  

For the first six years of residency in the UK, there is no charge to claim what is technically called the ‘remittance basis of taxation’. The remittance basis charge is £30,000 if you have been a resident for seven out of the last nine years and rises to £60,000 if you have been resident for twelve out of the last fourteen years. Once you have been resident for at least fifteen out of the last twenty tax years you can no longer claim that remittance basis – and you will be taxed just like any other UK resident.

Claiming the remittance basis of taxation also means that you lose your UK personal allowance (worth £12, 500 of tax-free income per year) and your UK dividend allowance (worth £2,000 of dividend income per year).

The ‘non-dom’ strategy, therefore, is useful primarily for the very wealthy and/or people earning a high income in the UK but who do not plan to stay for a long period of time.

Investments and currency exchange considerations

Investing is primarily about matching your future liabilities to your present assets. Adhering to this principle becomes more complicated when someone moves to a new country.

For one, their FX risk becomes perhaps their greatest investment risk - earning and owning pounds could be detrimental if the pound falls precipitously against the Canadian dollar just before you move back to Canada. It also makes sense to have a decent proportion of investments in the country in which you plan to live in the future – if the UK economy does well, then the costs of living in the UK are likely to rise and therefore it makes sense to ‘hedge’ that by owning UK stocks and keeping savings in pounds. But such an approach is complicated if you are planning to leave Britain.

Building an investment portfolio for an ex-pat is difficult because of the various crosscurrents that affect their future liabilities. Many expats cannot say definitively where they will live in 10-20 years’ time, making the planning even more difficult.

Taking a nuanced approach to portfolio construction - which means applying some probabilities to where the expat is likely to end up and adjusting those probabilities over time as their circumstances change – is hugely important to building and maintaining a portfolio that seeks to best match their likely future spending with their current assets.

Canadian Tax Free Savings Accounts (TFSA)

From a tax efficiency perspective, HMRC does not recognize the tax-free nature of Canada’s Tax Free Savings Account (TFSA).

Therefore, it is more tax efficient to contribute and save via an ISA – which is, essentially, the UK’s version of Canada’s TFSA. Your ISA contribution could be funded, at least in part, by transferring your TFSA.

However, if you are planning to move back to Canada relatively soon then transferring your TFSA may be inappropriate – partly because you wouldn’t want to lose the tax protected status of the savings/investments in your TFSA and also perhaps because you would be increasing your exposure to the pound and UK investments despite your future spending likely to be in Canadian dollars.

Nevertheless, while you are a resident of the UK contributing to your ISA is likely a good idea – particularly if you are able to invest in such a way that, at least partially, keeps you exposed to the Canadian dollar.