Degiro vs foreign income

anigys

I have a brokerage account in DeGiro (what is a Dutch company, I think). There, I have a number of ETFs, domiciled in the UK, Ireland and the US. I wonder how the income from the dividends of these ETFs is considered regarding being "foreign" (there, eg. is a separate personal allowance for foreign dividends).

I thought the UK and Ireland are considered "UK dividends" and the US ones "foreign". Is this correct, or, eg., are all dividend in DeGiro foreign because it's a Dutch broker?

Also, does anyone know if the foreign dividends are considered "remitted" to the UK? (there's a separate allowance for unremitted foreign income).

Thank you for the answers

bowlhead99

anigys wrote: »

I have a brokerage account in DeGiro (what is a Dutch company, I think). There, I have a number of ETFs, domiciled in the UK, Ireland and the US. I wonder how the income from the dividends of these ETFs is considered regarding being "foreign" (there, eg. is a separate personal allowance for foreign dividends).

There isn't a separate personal allowance for foreign dividends vs UK dividends, unless you mean that you are a UK resident but non-UK-domiciled individual and you are hoping to use the 'remittance' basis of taxation.

I thought the UK and Ireland are considered "UK dividends" and the US ones "foreign". Is this correct,

The UK ones are considered UK dividends, and the Irish ones and US ones are both considered "foreign" dividends because they are not "UK" dividends.

or, eg., are all dividend in DeGiro foreign because it's a Dutch broker?

The fact that the broker is overseas doesn't change whether the dividends you earn are from a foreign entity (e.g. Ireland, US, Luxembourg etc) or from a UK entity.

Note that the UK is not a domicile of choice for ETF providers as other countries have better international tax treaties or established their ETF industry earlier. While many ETFs are tradeable on the London stock exchange, that doesn't make them a UK domiciled ETF. The majority of ETFs listed on the UK stock exchange by providers such as iShares, Vanguard etc will be Ireland or perhaps Luxembourg domiciled (with some exceptions). So, while you might be thinking that a company or fund listed on a UK stock exchange is giving you UK income, the source of the income depends on where the company or fund is based.

Also, does anyone know if the foreign dividends are considered "remitted" to the UK? (there's a separate allowance for unremitted foreign income).

As a basic overview:
Generally UK residents pay tax on their worldwide income and gains, but if you're a non-UK-domiciled individual or not-ordinarily-resident individual, you are allowed to access the 'remittance basis of taxation' where you only pay tax on your UK income and gains and on the part of the foreign income and gains which is remitted to the UK. Basically, though it's more complex, 'remitted' means the foreign income or gains brought to the UK (e.g. transferred to your UK bank account or to a UK-based company's bank account or brought with you to the UK in cash) or is spent on goods or services you receive or bring to the UK.

If you claim the remittance basis of taxation you lose your UK personal allowances, and additionally you may have to pay a charge to access the remittance basis depending on how long you've been in the UK. So it can be an expensive choice for some. However, if you only have <£2k of unremitted foreign income and gains, and are not doing a self assessment tax return, you don't need to make a claim or pay a charge in order to access the remittance basis on just that little bit of income.

If you're like most people here (UK domiciled and ordinarily resident) you can't use the remittance basis at all. If you're not ordinarily resident or non UK domiciled, you can.

If you leave your income in the overseas broker's bank account or buy more foreign assets with it, you will not have remitted the money to the UK. But if you move the money to your UK bank account, buy UK assets, pay for a service while you're in the UK, pay off your UK credit card debt with it, transfer it to a friend who then pays you in cash here in the UK ; all of those would generally be remittances.

HMRC's manual on remittance basis of taxation has a subsection on identifying what is meant by a remittance
https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm33010

anigys

Thank you for a detailed answer.
Indeed, I am non-UK-domiciled and would like to remit the excess over £2k to enjoy the preferential tax treatment of small unremitted foreign income.

To summarize your answer, do you mean that:
- dividends coming from any non-UK-domiciled ETF are considered foreign income (this matters because only the first 300 pounds of foreign dividends is tax free, compared to 2k for all dividends, I think)
- the dividend being paid to the DeGiro's brokerage account (and transferred to GBP) is not considered remittance, as DeGiro is not based in the UK
- further buying of UK-based stock/ETF on DeGiro from this money would be considered remittance
- moving the money to a proper UK bank account and back would be considered remittance

Thank you

bowlhead99

anigys wrote: »

do you mean that:
- dividends coming from any non-UK-domiciled ETF is considered foreign income

Correct

(this matters because only the first 300 pounds of foreign dividends is tax free, compared to 2k for all dividends, I think)

That's incorrect, the first £2k of all dividends is taxed at 0% whether they are UK dividends or foreign dividends.

The £300 is just a reference to:
i) a UK self assessment tax return has a section for foreign income;

ii) but if your only foreign income is dividends under £300 you can include them with your normal UK dividend income rather than going through the hassle of doing a whole separate 'foreign income' section;

iii) someone with foreign income or gains would normally need to do a self assessment tax return - but if your only foreign income is dividends under £300 and you are not doing a full self assessment tax return for any other reason, you won't need to do a self assessment tax return solely because of the relatively small amount of foreign income. The reasoning is that even if you had done a self assessment, you would not even be using the foreign pages because you would be allowed to include it in the UK section because of (ii) above.

So someone whose only foreign income is <£300 dividends is not going to be forced to do a full UK tax return if they don't have any other reasons to do a full UK tax return... but that doesn't mean they are tax free. You still need to pay tax on them at your marginal rate. The marginal rate is going to be 0% on your first £2000 of dividends and some higher rate on anything after that.

If you're not doing a UK tax return for any other purpose, but had received £1800 of UK dividends and £250 of foreign dividends, you could simply write to HMRC and tell them you had received £2050 of dividends to ensure you pay the right amount of tax. Whereas, if you had received £100 of UK dividends and £250 of foreign dividends you might not bother writing to HMRC as there was no tax owed to them - unless the total £350 income would cause you to lose other allowances due to having too much total income (e.g. losing personal allowance because of earning over £100k total, etc).

- the dividend being paid to the DeGiro's brokerage account (and transferred to GBP) is not considered remittance, as DeGiro is not based in the UK

Correct, if a Netherlands broker receives a dividend from Ireland or from USA, and keeps it in Amsterdam on your behalf, that isn't a remittance of your income to the UK, because all that happened is that your Irish income was moved to the Netherlands.

- further buying of UK-based stock/ETF on DeGiro from this money would be considered remittance

I am not a tax adviser so you may wish to seek further advice or look carefully at the definitions or examples of remittance; but intuitively if you use your foreign income to buy UK property (an apartment in London, a car, an ownership share in Tesco plc) then effectively you have brought your foreign income to the UK.

- moving the money to a proper UK bank account and back would be considered remittance

Yes, if you have moved the money from Netherlands to the UK bank account you have remitted it to the UK, whether or not you later choose to move some of your UK money 'back' to a different country.

bowlhead99

---
One final bit of complexity - you mentioned you are investing in some US domiciled funds.

The UK has some rules to prevent tax avoidance, one of them being that they don't want people investing into a foreign fund where all the income from the underlying investee companies builds up in the foreign fund but isn't paid out as dividends, and then the UK resident sells the fund at a higher price and says it's a capital gain, when really a portion of the value creation was income earned but never reported or taxed as income.

HMRC's offshore funds regime says that to avoid that happening, capital gains made on a foreign fund should be taxed as income, unless the fund qualifies for "UK Reporting Fund" status. This means the foreign fund regularly publishes the amount of income per share that it received but didn't distribute each year, so that UK investors can report that as a 'deemed dividend' as they go along, rather than cheekily selling off the fund at a higher price and calling it a capital gain.

A large proportion of US-domiciled funds and ETFs do not bother to qualify for UK Reporting Fund status because UK investors are not their target market, and they do not care about the extra admin and compliance that would be required. This means a UK investor in these Non Reporting Funds would be exposed to a pretty punishing tax regime because their capital gains might have to be taxed as income (rather than using the annual capital gains exemption).

So if you are a UK resident investor, as a general rule if you want exposure to US stock market, it is better to do it through a UK or European fund (e.g. the Ireland- domiciled Vanguard FTSE North America UCITS ETF) rather than some US-based fund, because funds in Europe see UK investors as a large part of their target market and are more likely to ensure their funds get Reporting Fund status with HMRC.

A list of approved 'reporting funds' is at
https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds and contains tens of thousands of funds that are not UK based but are fine to invest in. But beware that a lot of US-based ETFs aren't on this list because they expect most of their investors are in the USA and won't care.