Russ Mould , investment research director at platform AJ Bell Youinvest, explains what admin, tax and currency issues to be aware of when buying and selling shares listed outside the UK
It is as easy to buy and sell shares listed on most developed, Western stock markets as it is domestic, London-listed ones.
You can do it at the click of a mouse via your normal online dealing account, or for your Sipp (Self-Invested Personal Pension) or Isa, since overseas stocks are eligible for inclusion in both of these tax wrappers.
A broker or platform provider’s website will quickly tell you which markets you can access through them.
Selecting shares: The US is generally the popular destination for any investors who want overseas exposure
Most will offer the US and key European markets as a matter of course although it can be difficult and expensive for them to obtain authorisation to operate on certain stock exchanges, such as those in Japan, Brazil or India.
In these cases, you will probably need to pick up the ‘phone and also expect to pay more in commission, too, because of the extra costs involved.
What does it cost to buy overseas shares?
The cost of placing an online trade can range from zero up to around £12 per transaction in liquid, developed markets.
Yes, some platforms do charge nothing, although the investor then needs to consider whether their trades really are free and how the service provider is covering its costs, especially in light of the old saying that ‘if you are asked to pay nothing for a product, then you are the product’.
Investors certainly need to consider dealing fees within the wider context of a platform’s overall charging structure and take into account product fees, administration charges and commissions on foreign exchange as well.
How do you buy overseas shares for ‘free’?
Find out how commission-free trading firms work here.
It will cost less to trade in liquid, easy-to-access developed markets like the US, which is generally the popular destination for any investors who want overseas exposure.
This is because it is home to many of the world’s biggest, best-known and most profitable companies.
In addition, US accounting standards are clear, management teams are shareholder-friendly, corporate governance is generally very good and company websites are excellent, so it is easy to find the information you need when you are doing your research.
However, dealing costs can head up to say £29.95 a trade if an intrepid investor is looking to head somewhere a little more off the beaten track. Investors may also find that platforms have minimum investment sizes in certain markets too.
Beware of overseas tax rules
In the case of US stocks, there is one important bit of admin which you must not forget. Before investing in American stocks and shares through your Isa or regular dealing account, it is necessary to complete a W-8BEN form.
This means you benefit by paying a reduced rate of dividend withholding tax, as the standard rate drops from 30 per cent to 15 per cent, which is a valuable saving, even if you will still need to declare any income if your shares are not held within an Isa or Sipp wrapper.
Russ Mould: It can be difficult and expensive for brokers to obtain authorisation to operate on certain stock exchanges, such as those in Japan, Brazil or India
Your broker’s website should feature a guide showing you how to complete the form and you need to do this every three years.
If you are buying only through your Sipp, you do not need to fill in the W-8BEN, as the US tax authorities recognise the Sipp administrator as the entity who can make the necessary declaration on your behalf.
The further good news for holders of US securities within Sipps though is the withholding tax rate is removed completely so you pay 0 per cent tax on any US income.
Fans of mining stocks who are trading shares in Canada will need to fill in its equivalent of the W-8BEN, the NR-301 form, but tax agreements can be less generous in other overseas markets, assuming there are any at all, and this is one area where investors must be very careful.
Switzerland, for example, withholds tax on dividends at a rate of 35 per cent and although UK residents can reclaim four-sevenths (20 per cent) under double-taxation treaty arrangements, these do not allow for any reduction of tax at source.
You can claim for repayment from the Swiss tax man but the time and expense involved mean some investors take the view this is not worth the bother, unless very large sums of money are involved, so they can lose out.
Investors need to watch out for financial transaction taxes, too, notably in France and Italy. These are applied as a percentage of the total purchase price and will be confirmed clearly by your broker or platform on the contract note.
How about currency movements?
A further area to watch is foreign currency. If the pound rises in value against the dollar, for example, then your overseas shares will be worth less in sterling terms, assuming the share price does not change.
Equally the pound may go down against the dollar, euro or yen, for example, and increase the worth of your foreign holdings, but you do need to keep an eye on currencies and this can be done easily over the web.
Also note any trades you make overseas are likely to bring an additional charge from your broker to cover the cost of translating the pounds in your account to the right local currency so they can buy the shares for you.
This is likely to run to around 1 per cent of your trade’s value. At least the standard 0.5 per cent stamp duty which applies on all UK share dealings does not apply when it comes to overseas stocks.
What is CREST?
CREST is the paperless trade processing system which ensures investors are recognised as the owners of shares which are dealt in electronic format. It also oversees other key functions such as the delivery of dividend payments.
International shares cannot be handled directly by CREST so it issues CREST Depositary Interests, or CDIs.
One CDI represents one share in an overseas stock and for most major markets they are a cheap, simple way of getting exposure to international markets.
A good number of brokers use them although note CDIs are usually dealt between market makers, rather than directly on the overseas exchange, so there could be a small cost involved in terms of the bid/offer spread at which you can buy or sell.
CDIs are not available on all markets – Japan and the key Asian arenas are notable exceptions – and in most cases they tend to be only available for large-cap stocks.
However, the major eurozone markets, as well as America, Canada and Switzerland, can be accessed in this way.
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