UK Individual Savings Accounts (ISAs)

What is the New Zealand tax treatment for someone holding investments in a UK Individual Savings Account (ISA)?

If you are tax resident in New Zealand and you hold investments in an ISA, you may have a tax liability either on the income generated within your ISA, or on an amount of notional income calculated under the New Zealand Foreign Investment Fund (FIF) rules.

What is an ISA?

An ISA is a name given to investments held within a UK tax-favoured ‘wrapper’. There is an annual maximum that can be contributed to ISAs, but year-on-year contributions can result in a substantial portfolio of investments that are exempt from UK income and capital gains tax.

Before ISAs there were Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs).

How does the UK treat ISAs if you cease to be UK tax resident?

If you take out an ISA whilst you are UK tax resident and then move abroad, you are allowed to keep your ISA, but you cannot contribute further to it whilst non-resident. If you subsequently return to the UK, you can recommence making contributions.

Anecdotally, ISA providers are now identifying non-resident members and telling them that they can no longer hold ISA investments with that provider. Unless another provider can be found that will accept your ISA funds, the ISA account must be closed.

How does New Zealand treat UK ISAs?

The tax-exempt status only applies to UK tax residents, so New Zealand tax residents must look at the underlying investments and determine the New Zealand tax treatment and make the appropriate entries on their New Zealand tax returns.

·        Any interest arising within an ISA must be declared as foreign interest arising in the UK (country code GB on a tax return).

·        For share or unit trust investments, the amount of income to declare in New Zealand will either be the dividends received (below certain limits) or a notional amount of income calculated under the FIF rules (above certain limits).

New residents in New Zealand and certain returning residents may qualify for Transitional Resident status. This would exempt income arising from ISAs from New Zealand tax (alongside foreign interest, dividends, FIFs, rents, pensions and royalties) for a period of 48-months, or slightly longer or shorter periods in some circumstances.