How to branch out abroad and buy foreign stocks

There are almost 2,500 stocks on the London Stock Exchange, but that's just a small fraction of the number of stocks listed around the world. And in many sectors, such as technology, the LSE is notably light on heavyweight companies.

So most of us will often have investment ideas where a stock listed abroad is a much better bet than one listed in the UK.

Despite that, many investors avoid buying foreign shares because they think it's more difficult and costly than buying British ones. Yet that doesn't need to be the case. Let's take a look at three of the most common questions from MoneyWeek readers about buying foreign stocks.

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Which broker should I use?

Several brokers offer major US and European shares, because these stocks can be bought through UK-based market makers and settled through Crest, the settlement system used for UK and Irish shares.

But shares listed in Asia and elsewhere can't be settled through Crest. That means that brokers need to have additional facilities in place to trade these markets, so not so many do.

In addition to checking whether a broker offers the markets you want, you should also look very closely at costs. Most brokers offer trades in international shares for a similar price to UK shares, but there will be an additional charge for converting from sterling to the currency the share trades in.

While some brokers allow you to hold foreign currency in your account so that you don't have to convert each time, many don't. What's more, foreign currency isn't allowed in an Isa so holding international stocks in an Isa will mean you're forced to convert currencies each time you trade.

Many of the best-known brokerages do not usually offer good value for international dealing because their currency commissions are relatively high: up to 2% with TD Direct Investing, 1.7% with Hargreaves Lansdown and 1.5% with Barclays Stockbrokers. That means it's crucial to factor this in when working out which broker offers the best deal for you.

Depending on which markets you require and your trading pattern, we reckon that one of the following will usually be among the cheapest: AJ Bell Youinvest, iDealing, Interactive Brokersand Saxo Capital Markets.Interactive Brokers is best suited to experienced investors only, due to the complexity of its trading platform.

Which ticker should I buy?

Most leading brokers allow you to trade in international stocks online, although some may offer some overseas markets for phone dealing only. The way you place a trade will usually be the same as for a UK-listed stock.

But you may find that searching for the stock on your broker's platform gives you a choice of tickers for the company, leaving you unsure which one to use.

Generally, you should choose the ticker that corresponds to the primary listing on the main exchange of the stock's home country.

For example, if you look for brewer Anheuser-Busch InBev, then, depending on your broker's system, you might see a listing on Euronext Brussels, an American depository receipt (ADR) traded in New York and an additional quote on a German exchange.

In this case, the primary listing and the one with the highest daily turnover is Brussels, so you should choose that. The US listing has decent liquidity in this case, but if you buy the stock as an ADR, a small custody fee will be deducted from every dividend it pays a cost you don't need to incur.

The German quote is relatively illiquid and you're likely to get a worse pricethan you would if you trade it on the Brussels exchange.

How does tax work?

UK residents investing in international stocks are subject to income tax and capital gains tax on their investments in the same way that they are for UK stocks. What can make things more complicated is that many foreign governments deduct tax from the dividend before it's paidto you. This is known as a withholding tax (WHT).

If you were taxed twice on the same dividend by the foreign government and by the UK, it would be rather unfair, so HMRC has two procedures in place to deal with this.

The first is that tax treaties between the UK and other countries limit the amount of withholding tax due on dividends paid to UK residents the cap is typically 15% under most treaties.

The second is that you can offset that tax against any UK tax you owe on the dividend. So in theory you can avoid double taxation. But unfortunately, it gets messier. Many foreign governments deduct a higher amount of withholding tax than that allowed under the treaty. You can reclaim the excess directly from them, but doing so may be bureaucratic.

You should be aware that the maximum amount of WHT you can offset against your UK liability is the cap specified inthe UK's tax treaty with that country. So, for example, if you receive a Swiss dividend, it will have 35% WHT deducted, but you can only offset 15%of that against your UK tax liability.

To avoid being taxed twice, you will need to reclaim the additional 20% from Swiss tax authorities. Depending on your holding size, this may not be worth the hassle and cost, so you should take this into account when deciding howattractive dividends on overseas stocks are.

For American stocks, it's possibleto have dividends paid net of just the15% treaty rate rather than the headline 30%, if your broker supports this (notall do, due to the costs involved).If they do, you'll need to complete a W-8BEN form to get the reduced rateof tax.