Arnold learned of André's capture the following morning, 24 September, when he received Jameson's message that André was in his custody and that the papers André was carrying had been sent to General Washington. Arnold received Jameson's letter while waiting for Washington, with whom he had planned to have breakfast. He made all haste to the shore and ordered bargemen to row him downriver to where the "Vulture" was anchored, which then took him to New York. From the ship Arnold wrote a letter to Washington, requesting that Peggy be given safe passage to her family in Philadelphia, a request Washington granted. When presented with evidence of Arnold's betrayal, it is reported that Washington was calm. He did, however, investigate the extent of the betrayal, and suggested in negotiations with General Clinton over the fate of Major André that he was willing to exchange André for Arnold. This suggestion Clinton refused; after a military tribunal, André was hanged at Tappan, New York on 2 October. Washington also infiltrated men into New York in an attempt to kidnap Arnold; this plan, which very nearly succeeded, failed when Arnold changed living quarters prior to sailing for Virginia in December.
Arnold attempted to justify his actions in an open letter titled "To the Inhabitants of America", published in newspapers in October 1780. In the letter to Washington requesting safe passage for Peggy, he wrote that "Love to my country actuates my present conduct, however it may appear inconsistent to the world, who very seldom judge right of any man's actions."
The British gave Arnold a brigadier general's commission with an annual income of several hundred pounds, but only paid him £6,315 plus an annual pension of £360 because his plot failed. In December 1780, under orders from Clinton, Arnold led a force of 1,600 troops into Virginia, where he captured Richmond by surprise and then went on a rampage through Virginia, destroying supply houses, foundries, and mills. This activity brought Virginia's militia out, and Arnold eventually retreated to Portsmouth to either be evacuated or reinforced. The pursuing American army included the Marquis de Lafayette, who was under orders from Washington to summarily hang Arnold if he was captured. Reinforcements led by William Phillips (who served under Burgoyne at Saratoga) arrived in late March, and Phillips led further raids across Virginia, including a defeat of Baron von Steuben at Petersburg, until his death of fever on 12 May 1781. Arnold commanded the army only until 20 May when Lord Cornwallis arrived with the southern army and took over. One colonel wrote to Clinton of Arnold, "there are many officers who must wish some other general in command". Cornwallis ignored advice proffered by Arnold to locate a permanent base away from the coast that might have averted his later surrender at Yorktown.
On his return to New York in June, Arnold made a variety of proposals for continuing to attack essentially economic targets in order to force the Americans to end the war. Clinton, however, was not interested in most of Arnold's aggressive ideas, but finally relented and authorized Arnold to raid the port of New London, Connecticut. On 4 September not long after the birth of his and Peggy's second son, Arnold's force of over 1,700 men raided and burned New London and captured Fort Griswold, causing damage estimated at $500,000. British casualties were high—nearly one quarter of the force was killed or wounded, a rate at which Clinton claimed he could ill afford more such victories.
Even before Cornwallis's surrender in October, Arnold had requested permission from Clinton to go to England to give Lord Germain his thoughts on the war in person. When word of the surrender reached New York, Arnold renewed the request, which Clinton then granted. On 8 December 1781, Arnold and his family left New York for England. In London he aligned himself with the Tories, advising Germain and King George III to renew the fight against the Americans. In the House of Commons, Edmund Burke expressed the hope that the government would not put Arnold "at the head of a part of a British army" lest "the sentiments of true honor, which every British officer [holds] dearer than life, should be afflicted." To Arnold's detriment the anti-war Whigs had gotten the upper hand in Parliament, and Germain was forced to resign, with the government of Lord North falling not long after.
Arnold then applied to accompany General Carleton, who was going to New York to replace Clinton as commander-in-chief; this request went nowhere. Other attempts to gain positions within the government or the British East India Company over the next few years all failed, and he was forced to subsist on the reduced pay of non-wartime service. His reputation also came under criticism in the British press, especially when compared to that of Major André, who was celebrated for his patriotism. One particularly harsh critic said that he was a "mean mercenary, who, having adopted a cause for the sake of plunder, quits it when convicted of that charge." In turning him down for an East India Company posting, George Johnstone wrote, "Although I am satisfied with the purity of your conduct, the generality do not think so. While this is the case, no power in this country could suddenly place you in the situation you aim at under the East India Company."
In 1785 Arnold and his son Richard moved to Saint John, New Brunswick, where they speculated in land, and established a business doing trade with the West Indies. Arnold purchased large tracts of land in the Maugerville area, and acquired city lots in Saint John and Fredericton. Delivery of his first ship, the "Lord Sheffield", was accompanied by accusations from the builder that Arnold had cheated him; Arnold claimed that he had merely deducted the contractually agreed amount when the ship was delivered late. After her first voyage, Arnold returned to London in 1786 to bring his family to Saint John. While there he disentangled himself from a lawsuit over an unpaid debt that Peggy had been fighting while he was away, paying £900 to settle a £12,000 loan he had taken while living in Philadelphia. The family moved to Saint John in 1787, where Arnold created an uproar with a series of bad business deals and petty lawsuits. Following the most serious, a slander suit he won against a former business partner, townspeople burned him in effigy in front of his house as Peggy and the children watched. The family left Saint John to return to London in December 1791.
In July 1792 he fought a bloodless duel with the James Maitland, 8th Earl of Lauderdale after the Earl impugned his honor in the House of Lords. With the outbreak of the French Revolution Arnold outfitted a privateer, while continuing to do business in the West Indies, even though the hostilities increased the risk. He was imprisoned by French authorities on Guadeloupe amid accusations of spying for the British, and narrowly eluded hanging by escaping to the blockading British fleet after bribing his guards. He helped organize militia forces on British-held islands, receiving praise from the landowners for his efforts on their behalf. This work, which he hoped would earn him wider respect and a new command, instead earned him and his sons a land grant of in Upper Canada, near present-day Renfrew, Ontario.