Five of the best Isas for international stocks

Your Isa investments don't have to be limited to the UK. It's also possible to hold shares in foreign firms in one. However, the rules for this are a little more complicated, and you need to be aware of an extra cost that can outweigh the tax benefits if you're not careful.

HMRC's rules allow shares that are listed on a "recognised stock exchange" which means most major markets in North America, Europe and Asia. But markets intended for smaller-growth companies sometimes aren't included, even if the main market is (just as stocks listed on Aim in the UK weren't eligible until 2013). A list of which markets and countries qualify is available on the HMRC website here.

One quirk to this is that some foreign stocks trade in the US as American depository receipts (ADRs) and this is often the easiest way for foreigners to buy them. If you want to buy an ADR listed on the New York Stock Exchange, you might think that the stock meets the recognised stock-exchange rule and qualifies for an Isa. But the ADR doesn't count as a full listing what determines whether the stock is eligible is whether it has its main listing on a recognised exchange. So many ADRs don't qualify, even though they trade in the US.

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While there are a few gaps in which exchanges HMRC accepts, the majority of foreign stocks that most investors want to hold will qualify. The bigger problem is regarding HMRC's rules on foreign currency. Cash paid into and held in an Isa must be in sterling. This means that whenever you make a purchase or sale, or receive a dividend, the money must be converted from or to sterling each time. That can be very costly, because most brokers charge a significant commission for FX conversions 1.5% or more in some cases.

Given that the average dealing fee for a trade is about £10, it's easy to see that the cost of the FX conversion will be greater than this for all but the very smallest trades. So when you're picking a broker for foreign stocks, don't just pay attention to the dealing commission. Look carefully for the FX rate as well: some firms are better about advertising this than others.

Isas shelter you from UK tax, but don't have special status with foreign tax authorities. That means that if the foreign government normally deducts tax from a dividend before it's paid (known as withholding tax), that will still happen even if the shares are held in an Isa.

If there is a double-taxation treaty between the UK and the foreign country entitling you to a reduced rate of withholding tax, you may be able to reclaim some of the deducted tax.

For American stocks, you can complete a form called W-8BEN, which reduces the amount of tax deducted (from 30% to 15%). However, not all brokers handle these, so if you're buying high-dividend US stocks, make sure you choose one that does.

Five of the best Isas for international stocks