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Investing in US stocks

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  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Post of the Month
    If held in an unwrapped fund and share account and the W-8BEN has been completed and the US retains the 15% tax from dividend payments, would the remaining dividend be tax free up to 2K like UK shares?
    You have a choice.

    Just to play with numbers theoretically, the divi on a £60k US investment is about 3.5% (£2100) and it's your only dividend income (UK or foreign) for the year.

    The US taxman gets 15% of the US source income leaving you with £1785

    You have a choice to either:

    (a) choose to declare it gross at £2100, and need to pay UK tax on the entire £2100, (which would be minimal if you have no other dividends in that year and are able to have £2000 at 0% and then the last £100 at 7.5% if you're not a higher rate taxpayer)... and you would deduct the foreign taxes already suffered on that income (£315) from your total £7.50 tax payable, and end up with £0 payable. But there is nothing repayable to you, you just get to tell HMRC that you don't owe any UK taxes on it, because your effective US tax was 15% and UK taxes on the same income would be less than that.

    Or

    (b) choose to declare the income at just the net amount you were paid (£1785) but then you can't claim any deduction for US taxes suffered because the income you're declaring is already net of foreign taxes. So you would just pay UK taxes on the £1785 of income - and if there are no other dividends that year, fortunately that's covered by your £2000 0% band on dividend income ('dividend allowance'). That's the method you suggested above, I think - just declare a net figure and pay full UK tax on the rest.

    As a general rule for foreign income, it's fair to say that depending on your personal circumstances, method (a) or (b) might give you a better result.

    You may or may not find the example useful - as I only made the figures up to demonstrate that you can have a decent amount of unwrapped investment while still not having any tax to pay on the income it generates (regardless of the method chosen). Many US shares pay a lot less than 3.5%.
  • cogito
    cogito Posts: 4,898 Forumite
    A point that isn’t generally realised is that the rise of the US market over the last few years has been almost entirely due to half a dozen stocks in the tech sector. No prizes for guessing which.
  • MaxiRobriguez
    MaxiRobriguez Posts: 1,783 Forumite
    Sixth Anniversary 1,000 Posts Name Dropper
    johnjohn82 wrote: »
    As i've already said, those stocks i menioned in the first post where just examples of US stocks that popped in to my head...

    I have a managed portfolio with a UK found manager which has various global funds.

    Its funny though, I remember mentioning various (I won't mention names this time) tech stocks about 2, 3, 4 + years ago on various blogs, forums etc. And I was told then they had reached thier "ceiling price", "the only way is down", "they have reached thier peak" etc etc. That type of doom and gloom talk put me off back then.

    My question was which stock broker is best value when trading US stocks, not investment advice. But thanks for the concern.

    "The only way is down" is never good investment advice because stocks and markets can do whatever they please in the short term.

    However, you probably should take stock and understand why people are saying these things. Equity, especially US tech, IS expensive by historical standards. Years worth of low interest rates, QE, buybacks, passive investment stretch has pumped the likes of Amazon, Google, Facebook etc.

    It was probably entirely sensible 3-4 years ago to believe that these stocks would decline in price. It's probably sensible to assume there's even less upside potential to these stocks now.

    If you've done your due diligence on the commercials and continued growth potential beyond looking at a chart then good luck to you, but personally if I were investing in single companies at the moment I would be looking for companies long standing companies paying decent dividends with limited debt.
  • stphnstevey
    stphnstevey Posts: 3,227 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    NASDAQ 100 tracker has all FAANGs, plus Microsoft

    Interactive Brokers (NOT Interactive Investor)- $2 FX and $1 US trades are unbeatable. FSCS, 40yrs in business, one of largest US brokers. Only downside is inactivity fees if under $100k equities

    Interesting in "choice" of declaring, any easy read references?
    Links to basics?
  • No; well, only as holdings of UK OEICSs, which means the dividends are treated just like a UK dividend for tax purposes. (The fund has paid the 15% but I don't need to deal with that directly.)



    Yes. And beyond the 2K, you can claim Foreign Tax Credit, so that any UK tax on the US dividends is reduced by the amount of US tax paid. So the effective UK tax rates on US dividends are 0% / 17.5% / 23.1% for basic / higher / top tax rate payers, for a total (US + UK) tax rate of 15% / 32.5% / 38.1% respectively.

    (The upshot of this is that if you have both US and UK dividend-paying stocks, your priority for your ISA should be the UK stocks. US dividends in your ISA incur the 15% with no ability of offsetting it against UK tax.)

    [Edit: you can choose an alternative treatment which in some scenarios works out better - see bowlhead99's post for the detail.]


    Thank you very much, this is really helpful to learn what is involved and I was thinking it was best to keep UK investments in the ISA and US dividends in a fund and share account. It is all making sense.



    In the future I may be interested to invest in some US dividend stocks / US REIT's for dividends in a fund and share account and like to understand how all the tax side works.
  • bowlhead99 wrote: »
    You have a choice.

    Just to play with numbers theoretically, the divi on a £60k US investment is about 3.5% (£2100) and it's your only dividend income (UK or foreign) for the year.

    The US taxman gets 15% of the US source income leaving you with £1785

    You have a choice to either:

    (a) choose to declare it gross at £2100, and need to pay UK tax on the entire £2100, (which would be minimal if you have no other dividends in that year and are able to have £2000 at 0% and then the last £100 at 7.5% if you're not a higher rate taxpayer)... and you would deduct the foreign taxes already suffered on that income (£315) from your total £7.50 tax payable, and end up with £0 payable. But there is nothing repayable to you, you just get to tell HMRC that you don't owe any UK taxes on it, because your effective US tax was 15% and UK taxes on the same income would be less than that.

    Or

    (b) choose to declare the income at just the net amount you were paid (£1785) but then you can't claim any deduction for US taxes suffered because the income you're declaring is already net of foreign taxes. So you would just pay UK taxes on the £1785 of income - and if there are no other dividends that year, fortunately that's covered by your £2000 0% band on dividend income ('dividend allowance'). That's the method you suggested above, I think - just declare a net figure and pay full UK tax on the rest.

    As a general rule for foreign income, it's fair to say that depending on your personal circumstances, method (a) or (b) might give you a better result.

    You may or may not find the example useful - as I only made the figures up to demonstrate that you can have a decent amount of unwrapped investment while still not having any tax to pay on the income it generates (regardless of the method chosen). Many US shares pay a lot less than 3.5%.


    Thank you as always Bowlhead for your detailed reply, I found your example very useful indeed for learning about this.



    I thought along the lines of option (b) which you explained on the net amount after the US takes it's 15% at source as such, that it would be tax free to 2K. If the amount went beyond that then UK tax is paid on the amount recieved in a tax year above 2K.



    It would take time to break 2K in US dividends in a tax year, so once US tax is taken it would be tax free on the UK end for quite a while on the 2K allowance.



    There has been some US REIT's and investments that have caught my eye and I often wondered how do you go about investing in them based in the UK so this is very helpful to learn.



    At some point I may try some US stocks / REIT's out in my fund and share account which is clear at the moment as I transferred all to my ISA a year or two ago, so the fund and share account would seem to be the place to put any US stocks and keeps them separate too.



    Much appreciated for explaining.
  • mortgageFTB
    mortgageFTB Posts: 262 Forumite
    Tenth Anniversary 100 Posts Combo Breaker
    FYI: Freetrade offers fee free trading/investing and the usual FSCS protection. https://freetrade.io/

    Maybe not as huge selection as some of the big brokers, but fee free none the less.
  • mortgageFTB
    mortgageFTB Posts: 262 Forumite
    Tenth Anniversary 100 Posts Combo Breaker
    Correction: fee free basic, but very small fees for whatever else classes as not basic.
  • stphnstevey
    stphnstevey Posts: 3,227 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    Correction: fee free basic, but very small fees for whatever else classes as not basic.

    and currency conversion fees of 0.45% and can't hold foreign currency, automatic conversion
  • To carry this on a little, those who have invested in US stocks, what have you invested in, or would like to invest in?


    If I was to invest in US stocks directly through a fund and share account, the REIT's interest me to give some diversity to from my UK REIT's.



    Realty Income Corporation for it's wide US exposure and WP Carey Inc for it's US and northern European exposure I think could compliment my UK REIT's as long term buy and holds.



    All ideas at the moment, may not move on anything for a while but as always, good to learn first.





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