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How much does it cost to invest in foreign markets?

The costs of trading overseas listed equities can be very high due to foreign exchange charges
July 15, 2020

Under performing domestic markets should make investors look overseas

The performance of US stocks and broader global equity markets in recent years has resulted in increasing numbers of UK investors looking to invest directly in overseas markets. Hargreaves Lansdown, the UK’s largest private investor platform, has reported a 40 per cent increase in the number of people buying overseas shares during the first five months of this year compared with the same period last year. And 21 per cent of all shares bought on Hargreaves Lansdown during this period were listed on foreign exchanges, compared to 15 per cent for the whole of 2019 and only 4 per cent in 2007. interactive investor, meanwhile, reports that its customers' international trades have doubled every month, compared to the same month last year, since February. 

The enthusiasm for US shares in particular has been driven by the strong performance of large tech companies, a sector that is not well represented in the UK market. The sectoral make-up of the US market is also a reason for its relative outperformance, in particular over the past three months. For example, around 25 per cent of the S&P 500 index is composed of information technology companies, compared with 1.2 per cent of MSCI UK index, according to wealth manager Tilney. 

And although some foreign companies, such as Amazon (0R1O), have small secondary listings on the London Stock Exchange (in the case of Amazon, under the ticker 0R1O), these are rarely accessible to private investors via platforms. Your platform will direct you to the primary listing where stocks are more liquid. In any case, an investor in a secondary listing in the UK would typically receive lower dividends because these are converted into sterling and a fee is charged for this. Where companies have a dual listing in London, such as Rio Tinto or Investec, you would simply buy the London-listed shares. 

However, it is more expensive to buy shares listed on overseas markets than those listed in the UK because you have to pay foreign exchange charges. Most platforms charge you the same dealing fee and ongoing account charge for UK and international stocks but, typically, you have to pay a charge on top of the spot rate when you convert it into the currency in which you are buying. Foreign exchange charges range between about 0.5 per cent and 1.5 per cent.

 

Some platforms offer better deals on international fund and share buying and others allow you to hold foreign currencies which can reduce costs. Click here to read our platform comparison guide for buying overseas equities.

 

 

What do I need to know about currency fluctuation?

Currencies' values also fluctuate against each other. Foreign exchange markets can be very volatile and this is particularly the case at the moment because of massive stimulus measures. Sterling weakened against major currencies in the first half of this year benefiting those investing overseas. But any strengthening in sterling against the currency in which you hold foreign shares will erode the value you receive when you sell them.   

 

Are there tax implications to international investing?

Before you buy overseas listed shares you need to carefully consider the tax implications. Income tax and capital gains tax (CGT) are still payable to HM Revenue & Customs for foreign stocks in the same way as they are for UK stocks, and you have to declare dividends and profits on your tax return. 

You do not pay UK stamp duty on purchases of overseas listed shares, but some other countries levy their own version of this. Ireland-listed stocks, for example, attract stamp duty of 1 per cent. And French and Italian stocks levy a Foreign Transaction Tax of 0.3 per cent and 0.1 per cent, respectively.

But US stocks do not levy a  Foreign Transaction Tax.  

When you receive a foreign dividend it is likely that it will have had tax deducted at source and, because you owe UK authorities tax, you could pay tax twice on the same income. But the UK has double taxation agreements with many countries whereby a maximum tax rate is agreed and can be offset against UK tax payable. However, as countries tend to charge more than the specified amount in the double taxation agreement you have to claim a rebate. With some countries, the process takes up to three months and can involve filling out multiple forms. 

The process is quite straightforward for US stocks. You complete a W-8BEN form via your platform and the tax rate you pay on dividends is automatically reduced from 30 per cent to 15 per cent. The W-8BEN form is valid for three years. And if your stocks are held within a self-invested personal pension (Sipp), the withholding tax is charged at 0 per cent. 

France charges private investors 30 per cent withholding tax, and Germany charges investors who hold stocks directly in their own names 30 per cent and nominee accounts 26.375 per cent. But their double taxation treaties with the UK allow you to claim a rebate and only pay 15 per cent tax, although you might have to contact the relevant tax authorities yourself to do this. Hargreaves Lansdown, for example, does not reclaim tax credits on your behalf in countries other than the US and Canada due to the complexity of tax regimes. 

If you hold overseas listed shares within an individual savings account (Isa) you still have to pay overseas withholding taxes, but you will not incur any UK income or CGT. See more on this in Follow the right tax procedures when investing in overseas shares in the issue of 2 August 2019. Foreign tax authorities don't usually charge CGT.

If you do not hold your foreign shares within a tax-efficient wrapper you declare the profits on your tax return. If you owe UK CGT you should be able to offset Foreign Tax Credit Relief against this. 

 

Consider funds for cost efficiency

Funds can be a cheaper way to invest in foreign listed equities than buying them directly. This is because a fund is a basket of shares or other assets, so with one holding and one trade you can have diversified exposure to a given market or area. Although funds charge an annual management fee, this could come to less than the trading charges for buying a sufficient number of overseas listed shares to get the exposure you want and ensure it is well diversified. You also only pay the trading charges associated with a UK security, and do not incur foreign exchange charges or taxes.

A way to reduce the amount of annual management fees you pay is to opt for a passive fund such as an open-ended tracker or exchange traded fund (ETF), as their charges are lower. For example, for US exposure iShares Core S&P 500 UCITS ETF (CSP1) has an ongoing charge of 0.07 per cent and iShares NASDAQ 100 UCITS ETF (CNX1) has an ongoing charge of 0.33 per cent. ETFs are also exempt from Stamp Duty in the UK.