If you’re from the United Kingdom or lived and worked there for a bit, you’ve probably heard of the term ISA.
You might even have one.
ISAs are one of the coolest investment tools in the world, helping UK residents turbo-charge their retirement savings.
But…what happens to your ISA when you leave the country?
Like everything living abroad, it turns out it’s a bit complicated.
Here’s what you need to know.
What is an ISA account?
An ISA or “Individual Savings Account” is an investment account called a “tax wrapper.”
Tax wrappers are these nifty tools some governments create for their residents to encourage them to make investments.
The idea is clear cut: The account holder can buy and sell eligible investments without paying tax on any transactions.
Everything inside the account is neat and tidy and protected from any investing-related taxes you do outside of it. (hence the “wrapper” name).
Each account has its own rules and exceptions.
Some are specific for retirement, meaning that you can’t withdraw any more until you’re ready to call it a day on your career.
(ISA accounts don’t have this limitation, but UK SIPPs do).
Tax Wrappers will also have yearly limits on contributions and how many accounts you can open at one time.
Depending on the account, you can make an early withdrawal if you’re buying your first house.
If you’ve lived in the US or even read some investment strategies from there, you have heard of:
- Traditional IRAs (short for individual retirement accounts)
- Roth IRAs
- 401Ks
In France, there are the PEA or “plan d’epargne en actions.”
These are all tax wrappers.
The UK has a few of these accounts:
- Investment ISA. This account holds eligible shares and investment funds.
- Cash ISA. These are savings accounts that grow savings without tax implications.
- Lifetime ISA. This wrapper encourages younger people to save and invest. To do so, the British government will match 25% of the holder’s annual contributions. For example, if you put in 400 GBP, the government will give you 100 GBP extra.
- Junior ISA. These help parents save and invest money for their young children. Once the kid turns 18, they receive whatever is in the account, tax-free.
- SIPP. Self-invested personal pension accounts. These are similar to ISA accounts but have rules making them better for retirement planning.
Tax wrappers sound pretty cool, right? We think so.
Sadly, for people living abroad, they’re just out of reach.
Why tax wrappers like an ISA aren’t great for people living abroad
Unfortunately for us people living abroad, tax wrappers aren’t so worthwhile for us.
Most countries want to encourage their citizens to save and invest outside of government pension plans.
To do so, they construct tax wrappers to be as efficient as possible under local rules and tax codes.
For them, they don’t really care what other countries do since the vast majority of their population will never expatriate.
As a result, most countries don’t recognize the wrapper.
That means that any tax protection you get from your ISA or other wrapped account will “disappear” once you become a tax resident in another country.
There’s probably not enough space here to dive into this subject in great detail.
However, most countries around the world practice what’s known as “residence-based taxation.‘
This system taxes its residents on their income, both in their territory and abroad.
Unless there’s a clause in a bilateral tax treaty (which isn’t the case), the country ignores the wrapper as it goes against local rules.
With the protection gone, the country will tax capital gains and income payments inside the account at local rates.
If that wasn’t enough, the type of investment inside the account could create even more tax headaches.
Suppose you use an ISA to invest in a local British stock or domestic investment fund.
In that case, you would potentially have to pay higher rates and file extra reports with the local authorities if they consider your holdings as “foreign investments.”
Indeed, what might have been a short-term benefit when you were living in the UK, the US, or anywhere else with a wrapper becomes a long-term liability when you move abroad.
Furthermore, once you leave the country with the wrapper, you lose the ability to contribute to it.
After all, if the benefit of these accounts is for the local population. Why would the government extend it to people who left?
That means that any investment strategy you build around it will grind to a halt, and you’ll have to start from scratch wherever you land.
As we say here in Spain, that’s “no bueno.”
So what should I do if I have an ISA or other tax wrapper when I move abroad?
A while back, we came across this question on a forum asking what a UK expat living in Spain can do with their ISA.
(It’s actually the inspiration for this post).
Here’s the gist of what this person could do.
Don’t panic or beat yourself up!
First, don’t feel bad about getting into this situation.
For one, moving abroad is a life-changing experience, which enriches you as a person far more than even the most incredible investment strategy.
Life isn’t all about money, and experiences matter more than we sometimes give credit to.
Second, you should be proud of yourself for opening an ISA or tax wrapper account in the first place.
Investing is intimidating, and you decided to take a bit of risk and invest in your future.
All too many people avoid taking the steps you did.
Don’t diminish your accomplishments.
Leave the ISA as-is
When you leave the UK as a tax resident, you’ll lose the ability to contribute to it (unless you’re a Crown Employee. In that case, you can ignore this info).
It’s likely better to leave it alone unless you need those funds immediately.
If you can, shift your investments into accumulating funds
Before losing the ability to contribute to the account, you should consider moving your investments into accumulating funds.
An accumulating or “capitalizing” fund automatically reinvests any profits (dividends, coupons, etc.) into the fund.
This reinvestment happens automatically, meaning you as an investor don’t have to pay taxes on the profits.
In turn, your investments will still get passive contributions, helping them to continue to grow even when you can put your money in anymore.
ETFs are a fantastic, low-cost way to invest in accumulating funds.
If you’re already a tax resident in another country, avoid selling your ISA.
Once you become a tax resident outside the UK, you’ll be liable to your new dwelling’s tax rules.
If you’re in a place practicing resident-based taxation, you would have to pay tax on any gains you make by selling your ISA.
Depending on your goals, you might not want to do that as it’s money lost you won’t recover.
Instead, you’re probably better off leaving it alone.
If you haven’t become a tax resident in your new home yet, that would be the time to sell your ISA as you wouldn’t be liable for the taxes.
For other tax wrappers around the world, check the rules.
As we mentioned above, other countries have tax wrapper accounts.
The rules vary from country to country and even wrapper to wrapper.
When planning to move abroad or even before opening the account, it’s essential to check what happens when you’re no longer a tax resident.
France, for example, can penalize PEA investors if they don’t stay in France for the immediate 10 years after opening it.
Americans are in an entirely different boat due to the unique citizen-based taxation.
In either case, checking and planning beforehand will save you from a massive headache later on.
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Self-managing an investment account is about the only other way to avoid these sorts of cross-border tax headaches.
Here, you’d need to pick investments and service providers that can cross borders without creating problems.
Then, while understanding the local rules, you can manage your investments efficiently, lowering your taxes and growing your wealth.
If that sounds complicated (and to be fair, it sort of is), we have you covered.
We created abroaden to help people living abroad like yourselves build your wealth regardless of where you call home.
Our tools manage your investments based on local rules, making them tax efficient and saving you time, money, and a mind-splitting headache.
That way, you can keep growing and contributing to your investments while living the life you want.
