Foreign Share ISAs

Discussion in 'Finance, Property, Law' started by Pork_Pie, Feb 25, 2007.

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  1. There are a lot of overseas stock market ISAs on offer. However, I am a little unsure about the tax advantages of these. Will try to explain why below.

    The UK has tax agreements with a lot of other countries, to prevent double taxation.

    For example, suppose a UK resident (resident for tax purposes) does a 2 month contract in the USA, the money they make might be liable to - say - £500 tax in the UK. However, if they have already paid £400 tax in the USA, all they pay to the UK Govt is £100 (£500, minus £400 already paid in USA).

    Suppose I opened a share ISA which invested in, say, the US stock market. Would any tax paid to the US authorities be recoverable? If not, and the only tax free element was any additional tax to be paid in the UK, such an ISA would appear to be less attractive to investors than a UK based one. Doesn't mean that you wouldn't invest abroad, just that the incentive is reduced.

    Alternatively, is the tax paid on any dividends (and also capital gains) recoverable from overseas governments?

    Grateful for any comments - and apologies if I have missed something really obvious.
  2. The key here is what is being taxed, and by whom.

    In a mutual fund you are taxed on your capital gain or income by the Tax man in your country on domicile (where you are based for tax purposes, assuming the UK) or where the mutual fund is domiciled (the UK, or if its offshore LUX etc). An ISA is a tax efficient wrapper around your mutual fund giving it certain tax properties by the UK revenue as regards income or capital gain.

    If your fund invests offshore, in say US equities, you won't be liable for any additional taxation from the US taxation authority (the IRS) as you are not domiciled in the US.

    The fund will incur transaction costs associated with dealing in US equities (exchange costs etc) but these are the costs of trading etc and, as far as I'm aware, apply equally to all participants in the market.

    The only case that I'm aware of where this isn’t the case is in the past where UK pension funds were exempt stamp duty on UK investment transactions. However, the Pensioners Best Friend (Not), Gordon Brown, did away with that in a seriously sh**ty bit of stealth tax, thereby adding to the pensions problem.

    So there is nothing to reclaim because there is no additional tax

    the advantage of investing overseas is that there are additional opportunities, and the potential for portfolio diversification. It must be remembered that investing overseas may have different risk properties (ie emerging markets may be more risky) and there is currency risk - in addition to the question of whether the asset class is going up or down, there is additional risk in that you are investing in another currency which can work for you or against you. If you are unsure of these issues, you should get some independent advice
  3. I want to invest in two overseas companies (viz EADS, owners of Paradigm Communications and Halliburton, owners of KBR(UK)).

    My current broker does not deal with the respective markets so I have had to find another broker.

    Can I open a second ISA, with the new broker, in order to maximise my tax-free savings allowance for this year?
  4. You can only open one ISA in one tax year.

    If you want to invest in those companies, find an on-line broker that deals in US shares. If you buy those shares, you can place them in an ISA, IIRC, but I reckon the charges will probably outweigh the tax savings (which are minimal anyway for most people except for the cash-ISAs).

  5. Thanks for the advice :) I will probably go with PD Waterhouse, who are waiving the normal £12.50 fee for two months.
  6. Sixty

    Sixty LE Moderator Book Reviewer
    1. ARRSE Cyclists and Triathletes

    Unless you live overseas permanently and the UK have a reciprocal tax agreement which allows you to use a coding of NT (r.sole, I realise it's not Stamp Duty but income tax. Just being helpful)

    You're then (depending on tax arrangements) taxed by another Government. May be more or less advantageous. A chap I dealt with in Switzerland doesn't pay UK IT but does pay a 'wealth' tax, for want of a better phrase. Another chap in Cyprus pays nothing.

    Individual circumstances though.
  7. Indeed.

    So, there are a range of reciprocal treaties shielding mutual funds from paying tax other than in their domicile? If so, this would answer my question.

  8. BiscuitsAB

    BiscuitsAB LE Moderator

    The aim of an Equity ISA is to provide a vehicle that is tax efficient, part of that is no liability to CGT on encashment or income tax if your taking an income from it. The option to invest in non uk based funds is for diversification and risk management.