Capital Gains and Dividend tax on foreign investment

neatz

Hi there,
I currently use an online, execution only broker (Degiro) to trade shares on the NYSE and NASDAQ exchanges and would like to know what I need to pay tax on.

Since the initial transfer of GBP into my degiro account, the money has been exchanged and held in the account as USD (never changed back to GBP as yet). Any USD gain made from selling shares is kept in USD and reinvested.

My understanding is that, despite the money remaining in USD between transactions, I would need take the USD amount and convert it to the GBP amount as per the exchange rate on the day the shares were bought and again on the day they were sold, then take one from the other to achieve the individual gain/loss. Then deduct my total losses for the tax year from my total gains to achieve the amount of capital gain. I heard that fees can be deducted from gains. If that is the case is it just the fees from the buying and selling that can be deducted or also the monthly connection fees and fees for changing currencies too?

I am also told that if I were to change the money back into GBP, I may have to include any gain made through the difference in the exchange rate as a capital gain/loss. If this is the case, does this still apply if the money remains in USD?

Lastly, I pay 15% US Tax when I receive a dividend, but am aware that we have a tax free allowance in the UK, it was suggested to me that there may be some entitlement to claim the 15% back but I’m not sure if this is the case or not.

Thanks

Neatz

Heedtheadvice

Well generally it is not fees but costs that can be used to offset any gains......
However I suggest you need specialist advice if it is a significant level of investment

Or if just a smallish amount just speak to HMRC and they will no doubt give some help and point you to published help documents/web pages.

You may find you owe tax in the USA as well as the UK but there will likely be dual taxation agreements.

Some very good posters here with lots of financial experience and good advice but probably few who can give you definitive or useful answers. Your broker might be a good start but that will probably cost if they are execution only.

EdSwippet

neatz wrote: »

Lastly, I pay 15% US Tax when I receive a dividend, but am aware that we have a tax free allowance in the UK, it was suggested to me that there may be some entitlement to claim the 15% back but I’m not sure if this is the case or not.

You cannot claim this 15% back from the US. This is the US's tax rate under the US/UK tax treaty, for dividends paid to UK residents. Only pension funds can claim the 0% dividend rate.

What you can and should do, though, is claim up to 15% in foreign tax credit against your UK tax. This avoids you having to pay double-tax on the dividends. The one case where you might lose out is if you do not have enough income to pay UK tax, since in that case you have nothing against which to set the foreign tax credit.

bostonerimus

My observations are why are you trading on US exchanges if you don't fully understand the tax implications and I assume that you have fully used your ISA allowance and UK tax free allowances.

As Ed points out the tax treaty rate for dividends is 15%, you'll have to claim that or you'll end up paying 30%. You should have claimed that on your W-8BEN or you cam file an 8833 with your 1040NR.

bowlhead99

neatz wrote: »

My understanding is that, despite the money remaining in USD between transactions, I would need take the USD amount and convert it to the GBP amount as per the exchange rate on the day the shares were bought and again on the day they were sold, then take one from the other to achieve the individual gain/loss.

Yes. The accounting records you have for the buying and selling are all in dollars but each of those individual buys and sells has an implicit GBP cost or GBP proceeds based on the dollar spot rate on the relevant date. That gives you your sterling equivalent gain or loss.

Then deduct my total losses for the tax year from my total gains to achieve the amount of capital gain.

Yes.

I heard that fees can be deducted from gains. If that is the case is it just the fees from the buying and selling that can be deducted or also the monthly connection fees and fees for changing currencies too?

Not the monthly connection fees / account maintenance fees as they are not a cost of the transaction. They're just payment for some ongoing financial services, and general expenditure of running your life isn't tax deductible.

But if you buy $1000 of shares and it costs $1002 due to transaction fees and then you sell them for $2000 and get $1998 due to transaction fees, your cost of that trade is genuinely $1002 to be deducted from your proceeds after selling costs of $1998, leaving $994 profit instead of $1000.

If you were buying shares for $1300 and paid for them with £1000 then £1000 is the cost regardless of whether it was a pure exchange rate of 1.30, or a market exchange rate of 1.31 plus a commission loading the exchange rate. So in that circumstance the fx commission is part of the transaction cost.

However if you buy the dollars all in a big lump at the start of the year, not associated with a specific purchase, then the fx commission becomes irrelevant for the individual trades which happen later in the year, because the cost in pounds of the specific stock purchase is what the dollars that paid for the trade were 'worth' in pounds at the time you exchanged them for the shares.

I am also told that if I were to change the money back into GBP, I may have to include any gain made through the difference in the exchange rate as a capital gain/loss. If this is the case, does this still apply if the money remains in USD?

If you haven't changed the money from USD back to pounds, you haven't bought and sold a dollar and realised a profit or loss on it. You have only bought it. You don't pay tax on unrealised gains. Likewise if you bought a Microsoft share and it went up in value and you didn't sell it, there is no realised gain to tax.

Lastly, I pay 15% US Tax when I receive a dividend, but am aware that we have a tax free allowance in the UK, it was suggested to me that there may be some entitlement to claim the 15% back but I’m not sure if this is the case or not.

As mentioned by others above you will be paying 15% (treaty rate) to US IRS on the US source income. Either by filling out the right form so your broker can arrange for withholding to be done at 15% instead of the standard non-tax-treaty rate of 30%, or as Boston says, if you haven't filled out that form and had paid 30% you would do a US tax return to say you'd paid more tax than you should, and would get back the difference between 30 you paid and the 15 you were entitled to pay.

But you can't generally get your US tax down to less than the 15% that US IRS wants.

If this dividend income was part of a US trade or business you could do a US tax return as a non-resident alien and if your expenses/ allowable deductions / exemptions exceeded the income, you'd be in a position where no tax was due and therefore you could claim back the 15 you'd paid. However in your case your dividends from the various NASDAQ or NYSE firms was not part of a US trade or business. As it's unconnected with US business its unlikely you can take any exemptions or deductions so IRS aren't going to pay you back.

Then from the UK HMRC angle you could claim the 15 foreign tax cost against the UK taxes you'd be paying on the 100 dividend income. Or just declare 85 dividend income ; whichever works out better for you. But the UK taxes you'd be paying on the 100 dividend income might be £nil if it's all within your annual dividend allowance; so if there's no tax being levied by HMRC on the income there is no scope to 'get back' the foreign taxes which were also levied on that income by deducting them from what you owe HMRC, because you don't owe HMRC anything.

eskbanker

bowlhead99 wrote: »

But if you buy $1000 of shares and it costs $1002 due to transaction fees and then you sell them for $2000 and get $1998 due to transaction fees, your cost of that trade is genuinely $1002 to be deducted from your proceeds after selling costs of $1998, leaving $994 profit instead of $1000.

Where did the other $2 go (from the $996 profit)? Were you bowlhead100 before someone took a sly slice....

bowlhead99

eskbanker wrote: »

Where did the other $2 go (from the $996 profit)? Were you bowlhead100 before someone took a sly slice....

In tax accounting the standard answer to "what is the profit" is "what would you like it to be...?"

But yeah you're right, £1998-1002 = £996

bigadaj

bowlhead99 wrote: »

In tax accounting the standard answer to "what is the profit" is "what would you like it to be...?"

But yeah you're right, £1998-1002 = £996

Now there speaks a man who's partial to a double Irish Dutch sandwich.