Witholding tax / tax treaties USA - UK

pecunianonolet

Hi,

I am thinking of starting to invest into an investment fund, nominated in USD in USA and wonder what the taxation situation would be? 

Let's assume I buy 10000 USD worth of shares of an investment fund. After a year I get paid a 5% dividend. How would the 500 USD be taxed? 

A bit lost with tax treaties, witholding tax, etc. so would be great if somebody could explain a bit more.

eskbanker

My understanding is that if you complete a W-8BEN form declaring non-residency then the withholding tax deducted in the USA will be kept down to 15% (rather than 30%), and you can subsequently offset that deduction against your UK tax bill.

So, your broker will pay you $425 net (and supply a tax voucher confirming $500 gross and $75 tax), and you could then offset the sterling equivalent of $75 against the UK tax due on your income (which will include the converted $500).

pecunianonolet

eskbanker said:

My understanding is that if you complete a W-8BEN form declaring non-residency then the withholding tax deducted in the USA will be kept down to 15% (rather than 30%), and you can subsequently offset that deduction against your UK tax bill.

So, your broker will pay you $425 net (and supply a tax voucher confirming $500 gross and $75 tax), and you could then offset the sterling equivalent of $75 against the UK tax due on your income (which will include the converted $500).

Thanks for the quick reply and being able to reduce the witholding tax from 30% to 15% is already good.

What I not fully understand is the offset part. Does that mean that I can lower my overall tax I have to pay by the equivalent sterling amount of $75 (ca £60) in absolute numbers or will this reduce my overall taxable income by that? The former would give me an absolute reduction of £60, whereby the latter would only work out as a reduction of the taxable income so the £60 would work out only a few quid (higher rate) really.

I would assume it is the latter, so the effect would be the same as having instead of 12570 free allowance 12630?

eskbanker

pecunianonolet said:

eskbanker said:

My understanding is that if you complete a W-8BEN form declaring non-residency then the withholding tax deducted in the USA will be kept down to 15% (rather than 30%), and you can subsequently offset that deduction against your UK tax bill.

So, your broker will pay you $425 net (and supply a tax voucher confirming $500 gross and $75 tax), and you could then offset the sterling equivalent of $75 against the UK tax due on your income (which will include the converted $500).

Thanks for the quick reply and being able to reduce the witholding tax from 30% to 15% is already good.

What I not fully understand is the offset part. Does that mean that I can lower my overall tax I have to pay by the equivalent sterling amount of $75 (ca £60) in absolute numbers or will this reduce my overall taxable income by that? The former would give me an absolute reduction of £60, whereby the latter would only work out as a reduction of the taxable income so the £60 would work out only a few quid (higher rate) really.

I would assume it is the latter, so the effect would be the same as having instead of 12570 free allowance 12630?

It's the former, the £60 would be credited against your tax liability.

bostonerimus

Why do you want/need to involve yourself in the wonderful world of US taxation, tax treaties and W-8BENs? There are plenty of UK investment funds...

GeoffTF

I assume that you are a UK citizen, based in the UK. You cannot invest in US mutual funds (which pay dividends free of withholding tax). In theory, you can invest in US domiciled ETFs provided that they have a KIID, but none of them do. In theory, you can get round that by registering as a professional investor, but you need appropriate qualifications and few brokers provide that service. You can buy US funds domiciled in the UK and the EU. You can invest directly in US shares, claim back some of the withholding tax, and offset what remains against dividend tax. The UK rules are nuts of course. Some EU countries interpret the relevant EU directive more liberally.

pecunianonolet

eskbanker said:

It's the former, the £60 would be credited against your tax liability.

So I essentially don't pay any tax at all? First, I reduce liability from 30% to 15% using that W-8BEN form. Second, the 15% I pay in the US I can offset. 
--> So I essentially no tax at all? Seems too good to be true.

bostonerimus said:

Why do you want/need to involve yourself in the wonderful world of US taxation, tax treaties and W-8BENs? There are plenty of UK investment funds...

Because the fund I have in mind is no longer listed in the EU with USD nomination. The equivalent Euro one is. Not sure if things have changed now since UK is no longer part of EU and the USD one is available again. Wanted to understand taxation before I dig deeper.

https://www.franklintempleton.com/investments/options/mutual-funds/products/105/A/templeton-growth-fund-inc/TEPLX

US is going into the next round of debt increase negotiations. With some Republican rebels, warnings from Yellen, this could get to a showdown similar to the recent speaker elections. The US would need to stop paying pension funds to remain functioning, at least until June they can survive that way. Looming recession, inflation, war in Ukraine, etc. could, especially if they not find agreement to increase the debt allowance (Republicans want major cuts in social welfare payments before they would agree, the rebels are unpredictable.) send the USD down and the fund is at a low level so seems a not too bad an opportunity to invest long term. 

Alternative suggestions are welcome :-) 

eskbanker

pecunianonolet said:

eskbanker said:

It's the former, the £60 would be credited against your tax liability.

So I essentially don't pay any tax at all? First, I reduce liability from 30% to 15% using that W-8BEN form. Second, the 15% I pay in the US I can offset. 
--> So I essentially no tax at all? Seems too good to be true.

No, that's not what I was suggesting - your $500 dividend is taxable income, so the withholding tax paid in the USA can be offset against the UK tax you'd be due to pay on it, which would be 33.75% if you're a higher rate taxpayer, unless that income can be accommodated within your dividend allowance (£2K, reducing to £1K from April), in which case the UK tax would be 0%....

https://www.gov.uk/tax-on-dividends

pecunianonolet

eskbanker said:

pecunianonolet said:

eskbanker said:

It's the former, the £60 would be credited against your tax liability.

So I essentially don't pay any tax at all? First, I reduce liability from 30% to 15% using that W-8BEN form. Second, the 15% I pay in the US I can offset. 
--> So I essentially no tax at all? Seems too good to be true.

No, that's not what I was suggesting - your $500 dividend is taxable income, so the withholding tax paid in the USA can be offset against the UK tax you'd be due to pay on it, which would be 33.75% if you're a higher rate taxpayer, unless that income can be accommodated within your dividend allowance (£2K, reducing to £1K from April), in which case the UK tax would be 0%....

https://www.gov.uk/tax-on-dividends

Thanks, that clarifies it. Not quite clear how you get the 33.75% but I would be able to offset against UK dividend allowance so in that case it would be 0% in UK, the 15% paid in the US are gone regardless.  

wmb194

In addition to what Geoff's written, you also have to be careful of taxation other than dividends with non-reporting funds as capital gains are classified instead as income and taxed at income tax rates.

https://www.justetf.com/uk/news/etf/us-domiciled-etfs.html

GeoffTF

wmb194 said:

In addition to what Geoff's written, you also have to be careful of taxation other than dividends with non-reporting funds as capital gains are classified instead as income and taxed at income tax rates.

https://www.justetf.com/uk/news/etf/us-domiciled-etfs.html

Yes, that is an important point. You should also consider the withholding tax treaties for the fund domicile. There are also possible currency conversion costs to consider. It is a good idea to look at the tracking error too. It is best to stick to retail funds from the large providers (notably Vanguard and Black Rock) on the large UK based platforms unless you really know what you are doing.