Capital Gains Tax on Israeli Investments for UK Residents

A retired teacher in Manchester inherited a share portfolio held at a Tel Aviv bank and braced herself for a double hit: Israeli tax on the sale, then UK tax on top. She had the arithmetic backwards. Israel, as it turned out, would take nothing from her at all, while HMRC would want its share in full. The surprise was not that two countries taxed her, but that only one did, and it was not the one she expected.

That pattern repeats for UK residents holding Israeli investments. Israel deliberately exempts most non-residents from capital gains tax on Israeli securities, hoping to draw foreign capital onto the Tel Aviv exchange. The United Kingdom, meanwhile, taxes its residents on gains wherever in the world they arise. Knowing which gains Israel actually reaches, and where the real bill lands, is what separates a clean disposal from an expensive muddle spread across two tax systems.

When Israel Taxes a Gain on Israeli Investments

The starting point is source. Section 89(b) of the Income Tax Ordinance 1961 treats a capital gain as Israeli-source when it arises from an asset located in Israel, which includes shares or rights in an Israel-resident company. On that basis alone, a gain on Tel Aviv–listed shares or in a private Israeli company sits, at first glance, within Israel's reach.

What pulls most UK residents back out of that reach is a set of exemptions Israel built specifically to attract foreign investors. They are generous, but they are conditional, and the conditions are where people slip.

This is investments: shares, funds, securities, bonds. Israeli real estate is a separate world with its own tax, mas shevach (betterment tax), and none of the exemptions below apply to it. If you are selling an apartment rather than a share portfolio, the rules in our guide to capital gains tax on an Israeli property sale govern instead.

The Non-Resident Exemption That Covers Most UK Investors

For securities traded on the Tel Aviv Stock Exchange, a non-resident is generally exempt from Israeli capital gains tax, provided the gain is not connected to a permanent establishment in Israel. For unlisted shares in a private Israeli company, an exemption applies to non-residents on shares acquired on or after 1 January 2009, again subject to conditions.

One condition matters more than the rest: the company must not be, in substance, a real estate company. If most of the company's value comes from Israeli land, the exemption falls away and Israel taxes the gain. This is the same boundary the treaty draws, which is not a coincidence.

In Practice: Under Section 97(b3) of the Income Tax Ordinance 1961, a UK resident is exempt from Israeli capital gains tax on shares of an Israeli company purchased on or after 1 January 2009, unless the company's value derives principally from Israeli real estate. The Israel Tax Authority (Rashut HaMasim) administers the exemption, but Israeli brokers still apply a default withholding of 25% at the point of sale, and recovering wrongly withheld tax through a refund claim typically takes four to nine months from filing. Establish the exemption with your broker before you sell, not after.

The Rates and Surtax When the Exemption Does Not Reach

Sometimes it does not reach. A pre-2009 private holding, a company whose worth is mostly Israeli property, or a gain tied to Israeli business activity can each bring Israel back into the picture.

When Israel does tax an individual's gain, the rates are:

• 25% on the real, inflation-adjusted gain for an ordinary shareholder
• 30% where you held 10% or more of the company at the date of sale or during the preceding 12 months, the substantial-shareholder rate
• A surtax on top at high income levels

That surtax deserves a note, because it changed in 2025. Israel already levied a 3% surtax (mas yesef) on very high income. From 2025 it added a further 2% specifically on capital income, so a large Israeli investment gain can now carry a combined surtax of up to 5%.

In Practice: Under Section 121B of the Income Tax Ordinance 1961, the surtax runs at 3% on total taxable income above NIS 721,560 (2025 threshold), and from 2025 an additional 2% applies to capital income (dividends, interest, and capital gains) above the same threshold, for a combined 5%. The Israel Tax Authority assesses this through the annual return, which a non-resident with an Israeli taxable gain must file by 30 April following the tax year. On a one-off gain that only briefly pushes you over the threshold, the surtax can add tens of thousands of shekels, so timing a large disposal across two tax years is worth modelling in advance.

How the UK Taxes the Same Gain

Here is the half the Manchester client had not weighed. A UK resident is taxed by HMRC on worldwide capital gains, whatever Israel does. An Israeli exemption does not delete the UK tax; it just means there is no Israeli tax to set against it.

For 2025/26, UK capital gains tax on shares and securities is 18% for gains falling within the basic-rate band and 24% above it, after the annual exempt amount, which has now fallen to £3,000. You report the disposal through Self Assessment, translating the shekel proceeds and cost into sterling at the appropriate rates. The foreign exchange movement between purchase and sale can matter as much as the share price, because HMRC measures your gain in pounds, and a flat share price with a moving shekel can still produce a sterling gain or loss.

Recent arrivals are a special case. The remittance basis for non-domiciled residents ended on 6 April 2025, replaced by a residence-based Foreign Income and Gains regime. Someone in their first four years of UK residence after at least ten years abroad may claim relief on foreign gains, including Israeli ones, but claiming it forfeits the £3,000 annual exempt amount and the personal allowance, so it is not automatically the better answer. Most UK residents with Israeli investments are long-settled and simply pay UK tax on the arising basis.

What the 2019 UK–Israel Protocol Changed

The 1962 UK–Israel Convention, updated by a Protocol signed in January 2019, sits over all of this. The Protocol entered into force on 28 October 2019 and has applied for UK capital gains tax purposes since 6 April 2020, so it is the version that governs any sale you make now.

Its capital gains article generally assigns the right to tax a gain to the country where the seller resides. For a UK resident selling Israeli securities, that reinforces what Israeli domestic law already grants: the gain is primarily a UK matter. The Protocol's headline change is the land-rich carve-out. Israel may tax a gain on unlisted shares that derive more than 50% of their value from immovable property situated in Israel, measured at any point in the 365 days before the sale. That is precisely the case where the domestic exemption also disappears, so the two rules point the same way. Where Israel does tax such a gain and the UK taxes it too, the treaty and UK foreign tax credit relief are what stop the same gain being taxed twice over.

Withholding, Refunds, and Running It from the UK

Because you are managing this from Britain, the mechanics deserve as much attention as the law.

On the Israeli side, the broker or bank generally withholds at source when you sell. Establishing your non-resident exemption means filing the right declaration with the institution, backed by evidence of UK residency, ideally before the trade settles. If tax is over-withheld, you reclaim it from the Israel Tax Authority, a process conducted in Hebrew that usually requires an Israeli representative to act under a power of attorney, because you cannot walk into the Jerusalem tax office from Manchester.

On the UK side, you report the gain through Self Assessment, claim foreign tax credit relief for any Israeli tax genuinely due, and keep your shekel records and exchange rates. Where the account itself is Israeli, separate reporting can apply under the Common Reporting Standard, which is independent of the capital gains question.

The coordination gap is the real risk. An Israeli accountant optimising your Israeli position and a UK accountant optimising your UK position will not, left to themselves, speak to each other, and the non-resident exemption in particular is invisible from the UK side. Someone has to hold both halves at once.

Where It Goes Wrong

Common Mistake: A UK resident sells Tel Aviv–listed shares, lets the Israeli broker apply the default 25% withholding "to be safe," and never reclaims it, assuming it was owed. In most cases it was not: the Section 97(b3) exemption applied, and the tax should never have been withheld. Reclaiming it after the fact means a Hebrew-language refund claim to the Israel Tax Authority, an Israeli representative under power of attorney, and a four-to-nine-month wait, during which HMRC still expects the full UK gain reported and paid. On a NIS 400,000 gain, that is roughly NIS 100,000 sitting idle in the Israeli treasury that a single declaration beforehand would have kept in your account.

Practical Checklist

• Confirm whether your Israeli shares qualify for the non-resident exemption before selling
• Check whether the underlying company is real estate–heavy, which removes the exemption and revives Israeli tax
• File your non-resident declaration with the Israeli broker to prevent the default 25% withholding
• Keep shekel purchase records and exchange rates for both Israeli indexing and UK sterling calculation
• Report every disposal to HMRC through Self Assessment, even where Israel taxed nothing
• Claim UK foreign tax credit relief only where Israeli tax was actually due
• Use an Israeli representative under power of attorney for any refund claim with the Tax Authority

Speak With an Israeli Attorney

Whether Israel taxes your Israeli investment gain, and how to stop an Israeli broker withholding tax you do not owe, turns on details most UK advisers never see: the company's asset mix, your acquisition date, and your non-resident status. An Israeli attorney can confirm your exemption, file the declarations that prevent or recover Israeli withholding, and coordinate with your UK accountant so the treaty and reporting pieces line up.

Contact us for a confidential initial consultation.