Stocks and Shares ISA for International Shares - questions

3Dwarves

Hello,
I am looking into the Stocks and Shares ISAs as alternative to saving some money for pension, so I am interested in a long term investment. There are some aspects of the way Stocks and Shares Isas work, besides the obvious tax benefit, that I don't quite understand. 

I looked into S&S ISAs threads but couldn't find the answer to this specific question I have. As I get it, if I decide to invest through the Stocks and Shares Isa in shares of companies listed on stock exchanges abroad - like the USA and Japan, I will have to pay more in fees and charges, than if I invest only in companies listed on the London Stock Exchange? Is this correct? I am planning to do it though the AJ Bell Youinvest where (as I understand it), I can chose the shares I want to invest in (I understand it is highly risky that way and I can lose everything).
In this regard, as I'm planning to invest long term maily (possibly only) in these types of companies, is it better to keep them in ISA with the tax benefits (but unknown other charges by the company) or deal though a dealing account outside of ISA. Is there a restriction of the companies lited on foreign stock exchamges I can invest? They must be CDIs - whatever that is - how can I know in advance if these shares are CDIs, before opening the ISA?

Also if the dealing is in U.S Dollars and my account is in UK pounds, does the platform do the exchange and what exchange rates does it use?
Can I fund the operation though a U.S. dollar account I have and aviod presumably unfavourable exchange rates?

My second question is, in the hypothetical event that I invest all of my £20,000 ISA allowance this year in stocks and shares of U.S.-listed companies as a long term investment for say 5 years. Will the fund charge me a rate (~0.5%) of the portfolio value per year if I just keep the shares there without selling them? It's a bit unclear for me from the rules on the ISA providers. Does it mean that I will have to pay on top of any other charges related to share dealing, about £100 (as per my example) the first year and any subsequent year, in case the value of the portfolio rises to say £25,000 at the end of the first year, another £125, etc? Also how is that calculated, do they take the value of the portfolio at the end of the year, just don't really understand that bit.

Thank you to whoever replies!

eskbanker

You've included a lot of questions in there, most of which are answered at https://www.youinvest.co.uk/our-services/international-dealing and https://www.youinvest.co.uk/sites/default/files/AJBYI_ISA_charges.pdf so probably worth reading those in detail and reverting with any outstanding clarifications needed....

bowlhead99

3Dwarves said:

I looked into S&S ISAs threads but couldn't find the answer to this specific question I have. As I get it, if I decide to invest through the Stocks and Shares Isa in shares of companies listed on stock exchanges abroad - like the USA and Japan, I will have to pay more in fees and charges, than if I invest only in companies listed on the London Stock Exchange? Is this correct? I am planning to do it though the AJ Bell Youinvest where (as I understand it), I can chose the shares I want to invest in (I understand it is highly risky that way and I can lose everything).

Whether your stockbroker or investment platform chooses to charge more for trades being carried out on a stock market than on the UK stock market, or even allows trading on foreign stock markets at all, is a decision for the broker or platform providing the service, and they will publish their rates. 

With the provider you mentioned, AJ Bell Youinvest, they don't charge an extra premium for online dealing on the overseas markets they cover. The basic fee is just the standard £9.95 (or £4.95 if you did 10+ trades in the previous month) as it would be for UK shares (although the extra-discount 'regular investing' service at £1.50 per purchase isn't available for foreign stock exchanges). However:

a) they charge a foreign exchange commission as you mention, because foreign currency can't be held in an ISA, and they need foreign currency to settle the trade in USD, JPY, HKD, EUR etc. And likewise if they sell an investment for you and need to get GBP from it to credit your account.  With AJ Bell this is 1% falling to a lower percentage if the trade is over £10k. This is a standard concept but some other brokers would charge more, some less.

b) the standard online fees only apply to transactions that you can book yourself online. If you are placing an order on some markets (e.g. HK or Tokyo or Singapore markets, you may find you can't get a real time quote online and need to place an order over the phone. And a phone deal is at £29.95 instead of £9.95.  But that wouldn't be an issue if you were trying to buy a share of e.g. Apple or Microsoft because you can just do that yourself online from the middle of the UK afternoon.

In this regard, as I'm planning to invest long term maily (possibly only) in these types of companies, is it better to keep them in ISA with the tax benefits (but unknown other charges by the company) or deal though a dealing account outside of ISA. Is there a restriction of the companies lited on foreign stock exchamges I can invest? They must be CDIs - whatever that is - how can I know in advance if these shares are CDIs, before opening the ISA?

A few questions in your sentences here:

- What the CDI thing is getting at is that although many UK brokers don't sit directly on the US or European exchanges  and settle through those foreign systems, most mainstream foreign shares can be settled in the UK via 'CREST Depositary Interests'. Crest is the UK settlements system owned by Euroclear.  Basically if you want a Microsoft share, CREST as our central securities depositary will issue a virtual certificate for a Microsoft share deposited into their system, which trades just like a 'real' directly settled share and gives you the standard risks and rewards of ownership of the underlying Microsoft stock that trades on Nasdaq. So these CDIs in Microsoft or whoever can be traded by UK brokers through the UK framework without extreme cost and inefficiency of being represented in all the 20+ underlying markets in which they offer trading.  However, some smaller foreign stocks won't be available as CDIs due to lack of demand,  so you won't be able to trade it, even if you can find a ticker for it on the foreign exchange.  You can generally find out whether a CDI exists for a company by looking at the London Stock Exchange website and searching the company name - e.g. https://www.londonstockexchange.com/market-stock/0QYP/microsoft-corp/overview

- Yes there are some other general restrictions. ISAs are only allowed to hold stocks listed or trading on a 'recognised stock exchange'. This includes most main markets in developed countries but doesn't include some of the smaller exchanges (e.g. other countries' equivalents of London's AIM market, even though AIM itself is allowed). There are a few foreign stocks which might appear to trade on big well-known exchanges but don't qualify.  For example, some Chinese companies seeking Western capital have listed on the US exchanges, however the US doesn't allow foreign companies to directly list their stock on its markets. The US has a system of 'ADRs' or 'ADSs' where - similar to the CDI explanation above - the US depositary will issue American Depositary Shares or Receipts representing a parcel of one or more underlying ordinary shares of the company concerned, and that ADR will trade on e.g. the New York Stock Exchange just like a real share might. However, it's possible that 'the real share' represented by the ADR might not actually trade on a 'recognised stock exchange' anywhere in the world, and therefore the ADR can't qualify to be held in your ISA, even if you can see a share price for the ADR quoted every minute of business hours in New York.

For example, I fancied making a speculative purchase of Chinese auto company NIO a while ago. Its ADRs trade on the US markets, but the underlying shares of the China or Cayman holding company don't trade on any recognised markets, so I couldn't buy it in my ISA. I just bought it in a normal general investment account instead (with AJ Bell, as it happens).

- If you are investing for the long term then yes, doing it in an ISA is better as even if there wouldn't be any tax to pay, you don't need to keep track of your investment costs and sales proceeds or dividend proceeds to prove it. Capital gains tax calculations can be particularly annoying if you have bought and sold at different times and your eventual sales are a long time after the purchases by which time you might have changed brokers or lost your records etc. An ISA account doesn't generally cost much (if anything) more than a general investment account.   In my example above, the fact I made some profit on NIO this year and was doing it outside an ISA means I need to do two capital gains tax calculations for the two sales I had this year just to prove that I didn't make enough profit to pay tax. 

Also if the dealing is in U.S Dollars and my account is in UK pounds, does the platform do the exchange and what exchange rates does it use? 
Can I fund the operation though a U.S. dollar account I have and aviod presumably unfavourable exchange rates?

The platform does the exchange at whatever rate it gets from the market at the time of the transaction (purchase or sale) but will load the rate to make a commission from your using a published fee rate, and as mentioned before, some brokers have higher or lower rates than others.  Sometimes they have a lower rate if they are just crediting you a dividend because they will in practice receive the dividend for all their clients at once and convert it once and split the proceeds. So instead of charging you 1% for converting your £100 dividend, they charge you 0.5% for your share of the £50,000 dividend they received.

You can't fund an ISA with dollars as the annual subscription limits are in pounds and foreign currency can't be held in an ISA, HMRC rules.  If you were using a non-ISA, general investment account then foreign currency may or may not be allowed depending on the particular broker. Interactive Investor (ii.co.uk) is one that offers multicurrency accounts although I don't know if they allow funding in all different currencies; but they do allow you to keep proceeds from investment sales or dividends in the currency they came from and to convert currency within your own cash account on their platform at a time you choose (not at a particularly low commission though).

My second question is, in the hypothetical event that I invest all of my £20,000 ISA allowance this year in stocks and shares of U.S.-listed companies as a long term investment for say 5 years. Will the fund charge me a rate (~0.5%) of the portfolio value per year if I just keep the shares there without selling them? 

Your second question? closer to your tenth...
You are mixing terminology here. If you invest in a share of an *investment fund* - which is a collective investment scheme where a fund manager buys a portfolio of investments on behalf of you and a load of other co-investing customers, with the aim of managing its portfolio to diversify your risk, and the value of that share goes up and down from time to time in line with the underlying assets and can be sold whenever you like but you don't have control of the choices of underlying investments in the portfolio - then yes, you would expect to pay an ongoing charge for the investment management service and running costs of the 'fund'.

But what you are describing is you putting money into your ISA and self-selecting a bunch of investments (US listed company shares) to hold. You are not buying a share of a 'fund' which in turn invests in shares, you are buying individual investment assets yourself. For the service of holding your assets and doing the HMRC compliance and reporting on your ISA status, the stockbroker or investment platform may charge you a fee. With AJ Bell from your example, the annual shares custody charge (including investment trusts, ETFs, gilts and bonds) is 0.25% a year capped at a maximum of £30 a year.     (https://www.youinvest.co.uk/isa/charges-and-rates).

As you can see from the link, if you were using 'funds' (which are more complicated to hold but don't have as high transaction fees) they would charge you 0.25% a year but not capped until you reached £250,000 of assets; and there would also be running costs charged by the fund manager of the fund too.

Does it mean that I will have to pay on top of any other charges related to share dealing, about £100 (as per my example) the first year and any subsequent year, in case the value of the portfolio rises to say £25,000 at the end of the first year, another £125, etc? Also how is that calculated, do they take the value of the portfolio at the end of the year, just don't really understand that bit.

Don't get confused between:
A charge paid by you to 'deal' (when you buy and sell individual investments for your account) (e.g. £9.95)
A charge from the broker or platform to you for holding exchange-traded assets like shares or investment trusts or ETFs, if you have any (e.g. 0.25% capped at £30 a year)
A charge from the platform to you for holding investment funds, if you have any (e.g. 0.25% a year capped at £250k of assets)
A charge from an investment fund manager to the fund that they run, for running the investment fund (e.g. 0.5% of the assets of the fund per year).

In your example, with 0.25% annual charge capped at £30 a year (£7.50 a quarter), it doesn't get any higher once you get over £12,000 (because £12,000 x 0.25% is £30, and £12,001 x 0.25% is a little more but they cap the charge at £30 a year, £7.50 a quarter, so it won't go up even if your asset values go up). 

3Dwarves

Thank you so much, bowlhead99! A lot to digest now but very helpful explanations!

Steve182

I use both II and AJ Bell

Bell has lower FX commission, starting at 1% up to £10K then it's a sliding scale. However you are obliged to keep money in £ so you pay FX commission on every trade whether it's buy or sell. So if you sell say $10K USD in Amzn then use the same money to buy Baba you would pay the 1% commission twice so 2% overall.

With II you pay $1.5% for the 1st £25K then it's a sliding scale. But with II you can keep money in your account in $, so once you are holding $ you can buy/sell in that currency and pay no further FX commission. 

Steve182

I forgot to add, II charges me £10/month fixed rate for holding shares and funds in my ISA regardless of value.
Bell is a %age fee but if you only invest in stocks/shares/IT's and not funds (which cost more) it's capped at £30/year 
Obviously dealing costs are extra

3Dwarves

Thank you, Steve182, I'll consider II too! 

bowlhead99

Steve182 said:

With II you pay $1.5% for the 1st £25K then it's a sliding scale. But with II you can keep money in your account in $, so once you are holding $ you can buy/sell in that currency and pay no further FX commission. 

But the OP was specifically looking for an S&S ISA account and as I mentioned in my previous post, US dollar cash is not an eligible investment to be held in an S&S ISA, so any sales proceeds would surely have to be translated back to pounds and new investments purchased with pounds (incurring commission costs each time) whether you like it or not.  The ability to hold cash in other currencies is only available in a general investment or trading account, and not in an ISA, per HMRC rules

I used to have accounts with II (formerly TD before the takeover, same systems platform) before moving those accounts over to AJ Bell when the price and features were no longer a good deal for me based on the level of activity in my trading account. That was a long time ago now but according to their marketing, the multi-currency cash account is only a feature offered in their trading account or SIPP, not in their ISA. (https://www.ii.co.uk/investing-with-ii/international-investing).  HMRC rules mean it can't be any other way.  If the investments are to be a long term hold and not actively traded, the OP would probably get more benefit from using an ISA (saving admin hassle and potential taxes) than by using a non-ISA multicurrency account (saving some round-trip fx fees); and while II have decent systems and offer plenty of international markets, the minimum charges to maintain a trading account would be higher at II than they might find elsewhere.