International stocks: Consider costs before investing abroad

More and more British investors are branching out by buying shares in international companies directly, rather than through funds. You don’t have to give up the tax benefits of an Isa to do this, but the rules and costs can be more confusing than with UK stocks. Here’s what you need to know.

What you can hold

You can hold foreign stocks listed on a ‘recognised stock exchange’ in an Isa. The main exchanges in most major developed markets qualify, as do a number of emerging-market exchanges. Small caps and growth companies often don’t. To check, see the HMRC list
. Corporate bonds qualify if they
are listed on a recognised stock exchange or issued by a company listed on one. However, just because an investment is permitted under HMRC rules, doesn’t mean every Isa provider will allow you to hold it. Most brokers offer a limited selection of international markets.

What about foreign funds and ETFs?

For a fund or exchange-traded fund (ETF) to be Isa-eligible, it needs to be authorised for sale to UK investors. Since relatively few foreign funds will apply for UK authorisation, most non-UK funds will not be eligible.

What’s the tax treatment?

Isas will shelter you from UK income and capital gains tax on foreign shares, but don’t receive special treatment from tax authorities in other countries. This means that, if the foreign government deducts withholding tax (WHT) from dividends, you will suffer the same deduction as if you held the same share outside an Isa.

However, if you are normally entitled to reclaim some of this tax from the foreign government under a double taxation agreement (DTA) between the UK and the foreign country, you should be able to reclaim it for shares held in an Isa too. For US stocks, the W-8BEN form that UK residents can complete to get WHT relief at source also applies to Isas, although not all brokers handle these.

What will it cost?

There is one big catch to holding foreign stocks in an Isa: any tax savings made can easily be swamped by added costs. That’s because most brokers charge commission for converting sterling into a foreign currency and back again. This charge can be up to 2% in some cases and is the big hidden cost of international investing – it can often be greater than the trading fee itself. For this reason, it’s best to avoid converting currencies more than you have to – but unfortunately, HMRC regulations only allow cash in sterling within an Isa. As a result, you will need to convert to and from sterling on every purchase, sale and dividend received. So you can see how these costs could easily outweigh the tax benefits.

You should always scrutinise foreign-exchange (FX) costs when choosing a broker for international stocks, but it matters even more for an Isa. The table below lists five brokers we think are cheap or offer decent value for a flexible service. Experienced traders could also consider Interactive Brokers. It does not offer an Isa but may still be cheaper after tax for some because of its very low fees.

The best Isas for international stocks

Markets available Charges in an Isa Notes
AJ Bell Youinvest
www.youinvest.co.uk
Canada, UK, US, western Europe online. Some other markets available by phone No Isa fee, £9.95 per deal online, £29.95 per deal by phone, 1% FX commission on trades Recently raised FX rate, but still competitive. Handles W-8BEN
iWeb
www.iweb-sharedealing.co.uk
Belgium, France, Germany, Italy, Netherlands, UK, US No Isa fee, £5 per deal, 1.5% FX commission on trades, one-off £25 account opening fee No Isa fee and low dealing fee for small accounts and trades, but FX rate uncompetitive for large deals. Does not handle W-8BEN
iDealing
www.idealing.com
Canada, UK, US, western Europe £5 per quarter Isa fee, £9.90 per deal, trades via market makers that charge up to 0.5% FX commission Likely to be the cheapest broker for holding major European and north American stocks in most Isas. Does not handle W-8BEN
Saxo Capital Markets
www.uk.saxomarkets.com
Australia, Canada, Hong Kong, Singapore, South Africa, UK, US, western Europe £35 per year Isa fee, commissions vary by market, 0.5% FX commission Minimum account size for Isa of £50,000. Handles W-8BEN
Stocktrade
www.stocktrade.co.uk
Canada, UK, US, western Europe online. Some other markets available by phone 0.5% per year Isa fee (min £30, max £120), 0.4% per deal (min £14.50, max £50), £50 settlement fee for non-Crest foreign stocks, up to 1% FX commission depending on trade size Not the cheapest option, but a flexible service that could be cost-effective for large accounts and trades. Handles W-8BEN

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