The International Investor

Tax hit for UK investors in offshore funds

News

Jul 202012

Interesting article on Citywire today covering the tax position of offshore funds for UK investors:

Wealth managers who unwittingly put their clients into the wrong type of offshore fund, structured product or ETF risk saddling them with a tax hit of up to 50% on their investments, accountants have warned.

Small boutique funds and new products coming to market that are based offshore may not have reporting funds status (RFS), or could still be in the process of seeking it. Many investors also view ETFs as shares rather than funds, exacerbating a lack of understanding on the issue.

Investors who redeem holdings in funds that do not have RFS could face punitive income tax rates of up to 50%, rather than capital gains tax of either 18% or 28%.

This is a topic I’ve covered on the site before: Avoid the tax trap on foreign funds. Unfortunately, it is no surprise to come across individual investors falling foul of this, since the rule is completely counter-intuitive at first – why would you expect that capital gains would be taxed as income?

However, it is a little more surprising if any significant amount of wealth manager clients are having this problem – as the accountants in the article are suggesting – since the issue is not exactly obscure and one would expect it to be well-recognised among any advisers who are putting clients into offshore funds.

Reclaim all tax on foreign dividends in SIPPs – a list of countries

FAQs

Aug 282011

Following the article about reclaiming withholding tax (WHT) on foreign dividends into SIPPs, I looked for a full list of countries where the little-known tax break for pension plans to get back all the WHT might apply.

Unfortunately, there doesn’t seem to be one. But if you go through the UK double taxation agreements digest [PDF] it lists several countries where pension plans get extra relief from withholding tax.

The digest concerns relief from UK tax for taxpayers in those countries, but these things are usually reciprocal. So the countries mentioned there seemed a good place to start when checking HMRC’s double taxation manual and the relevant double taxation treaties.

Holding foreign funds and ETFs in an ISA

FAQs

UK investors are often unsure about the rules for holding foreign funds and exchange traded funds (ETFs) in an Individual Savings Account (ISA).

The regulations on foreign shares are clear. These are eligible for an ISA if they trade on a recognised stock exchange. But funds – especially ETFs – never seem so simple. Even the ISA providers sometimes disagree on what’s eligible.

HMRC has a short list of ISA eligible investments online, but it still leaves some points unclear. So I asked HMRC’s ISA specialists to confirm some of the less straightforward situations.

In general, their answers mean that most foreign funds and ETFs will not be eligible, although there are a couple of exceptions. For the details, read on.

Avoid the tax trap on foreign funds

FAQs

The UK and the US have very harsh rules on taxing profits from foreign funds. Both will tax any capital gains you make from most foreign funds at income tax rates rather than capital gains tax rates.

These rules were originally brought in to stop investors reducing their income tax by rolling the income up in an offshore fund and taking it as a capital gain. Since capital gains tax rates are usually lower than income tax rates, doing this could save a lot of tax.

So the authorities cracked down. Unfortunately the rules are very broad and catch many investors who simply want to invest in a fund abroad because an equivalent fund isn’t available at home.

The result is that foreign funds are usually very unattractive for US investors, because the tax penalties can wipe out any gain. For UK investors, the situation isn’t quite so bad – but they should stick to foreign funds with a special tax status where possible. Let’s look at the details for both.

Reclaim withholding tax on foreign dividends in an ISA or SIPP

FAQs

If you hold your foreign stocks in an Individual Savings Acount (ISA) or Self-Invested Personal Pension (SIPP), you’re sheltering them from UK tax as much as possible. But you may still be paying more tax on them than is absolutely necessary.

That’s because many foreign governments impose withholding tax (WHT) on dividends before they even reach you. And in many cases, they are charging WHT at a higher rate than they are supposed to under their tax treaties with the UK.

Many investors don’t read the rules on this and just accept what they get. But if you understand how it works, you may be able to reclaim a sizeable amount of tax from abroad.

You could even get an extra 15% tax break on American dividends in your SIPP that most investors don’t know about. To find out how, read on.

How to reclaim withholding tax on foreign dividends

FAQs

This article briefly explains how to reclaim withholding tax on foreign dividends. If you’re looking for an fuller explanation of how foreign dividends are taxed and why you could be paying too much, see this article on tax and foreign stocks (it’s aimed at UK readers, but the principles apply to many other countries). If you want to understand the situation for ISAs and SIPPs specifically, see this article.

If you’ve had too much withholding tax (WHT) deducted from your foreign dividends, you can often reclaim the overpayment. Doing so involves writing to the tax authorities in the country that the company is based in and asking for a refund.

For some countries, this is pretty simple. Others going out of their way to make it as hard as possible. Frankly, except in countries with simple and well-established procedures, you may end up questioning whether it’s worth it or not.

Obviously, if you have substantial dividend income from a particular country, you should probably make the effort. But whether a 5-10% difference in tax on the income from a small shareholding is really worth the time, effort and sanity needed to deal with tax officials around the world is up to you.

Below, I’ve listed the rules and forms for several major countries. In some cases you may be able to make your stock broker do the work, so check before tackling all the forms yourself.

Tax on Singapore stocks for non-residents

FAQs

Aug 072011

This article is about Singapore stock brokers and tax for non-residents. Looking for a stock broker in Singapore instead? Read this comparison of the best Singapore brokers and articles on opening a bank account and opening a brokerage account there.

I’ve often get questions about tax on stocks for non-resident investors who have a Singapore stock broker account. The answer is both simple and good news for most investors.

Singapore is an extremely low-tax jurisdiction and if you are non-resident, you should end up paying nothing to the local tax authorities – although obviously you may still owe taxes in your home country.

Holding foreign stocks in an ISA or SIPP

FAQs

Many UK investors don’t realise that a personal tax wrapper – ie an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP) – can be used to shelter foreign shares from tax.

Most brokers don’t really advertise this useful rule and some don’t permit foreign shares to be held in these accounts – especially with ISAs. To check whether your broker does or find one who will, see the UK stock broker comparison table.

But that’s their decision, not the tax authorities. The UK regulations are clear. To qualify for an ISA, a stock must simply be listed on a recognised stock exchange. A list of recognised exchanges can be found on the HMRC website here.

With SIPPs, almost any investments are permitted, including shares anywhere in the world. Some providers apply the same recognised stock exchange restriction for foreign shares, but others allow you to hold almost all overseas stocks and funds [PDF].

That may have answered your question already. However, there are a couple of quirks to the system. And to get the best use of your ISA or SIPP for foreign stocks, it helps to understand way they are taxed. For more on that, read on.

Paying UK tax on foreign stocks

FAQs

If you’re a UK resident, you need to pay UK income tax on your dividends from foreign shares and UK capital gains tax on any sale proceeds. There’s no getting away from being taxed just because you’ve bought foreign assets.

You will generally escape being stung with UK transaction taxes such as stamp duty, although some markets will also charge their own local levies. But that’s the only break. You usually need to declare your savings and investment income from abroad.

These principles are very simple. Where it gets complicated is that many countries will levy their own taxes on this foreign income. So when you receive a foreign dividend it will often already have had some tax deducted at source.

You are then due to pay a further round of tax on the same income to the UK tax authorities. So if you’re unlucky, you could end up being taxed twice on the same income.

You can stop this happening. But you need to be alert and know how the system works.