As UK expat now living in a country with no CGT or income tax, without foreign income tax treaties, it’s very inefficient for me to even consider shares or ETFs where dividends are taxed at source.
Even investing in an ETF domiciled in Ireland only reduces the US withholding tax on dividends from 30% to 15% and, well, 15% is 15% more than I would pay if I invested in an ETF which ONLY bought into companies which reinvested such income into its future expansion or into share buybacks.
Over the longer term this would make a HUGE difference and is stopping me from investing anywhere but the UK which will not withhold anything at all, leaving me to sort out in my very benign jurisdiction.
Sure the UK charge 0.5% stamp duty at the time of purchase, but if I wanted to avoid this there are many other exchange worldwide where this is not the case.
If I’m correct, then I should be able to find an ETF entitled something like (jokingly) “S&P 500 no dividends”.
Am I missing something obvious here or am I on to something? It’s preventing me from spending anything at all in the US market.
0.5% stamp duty isn’t the biggest charge in the world and is only a one time fee.
The dividend WHT on US stocks is a pain, 15% can have a reasonable impact on the compounding effect of a dividend strategy, the alternative is to invest in growth stocks that pay little or no dividend. Probably find a Nasdaq or tech startup based ETF will have minimal dividends.
The 15% WHT only impacts the dividend return from a stock, I wouldn’t necessarily avoid investing in a company because of it. The capital gain is equally important to your total return.
(yes, and I’d like to delay the former and minimise the latter)
0.5% stamp duty isn’t the biggest charge in the world and is only a one time fee.
(yes, 30% or even 15% WHT is the killer which I am focused on for my situation)
The dividend WHT on US stocks is a pain, 15% can have a reasonable impact on the compounding effect of a dividend strategy, the alternative is to invest in growth stocks that pay little or no dividend. Probably find a Nasdaq or tech startup based ETF will have minimal dividends.
(Thanks for that. I have looked and right now I have found nothing, so currently I am building my own “fund” based around such companies on the S&P500)
The 15% WHT only impacts the dividend return from a stock, I wouldn’t necessarily avoid investing in a company because of it. The capital gain is equally important to your total return.
(strategically, focusing on non-dividend paying companies is far more tax efficient for me)
Just chiming in a few other thoughts here for you:
Could transaction FX play a big deal too though?
Surely buying into your own version of a DIY S&P will incur more potential downside (or upside) due to the FX gain or loss.
I’m sure the real noticeable gains will come from stock price appreciation, not necessarily the dividend compounding amount. S&P500 annual dividend is like 1.5% or something in that ballpark, so worrying over 15% WHT on that amount, is only the difference of a good or bad day for the stock price? As far as I understand.
Not that it would matter much, but also worth noting is that no UK stamp duty is paid on stocks valued at less than £1. So if you had a script/program, you could technically buy a lump of £1 shares and not pay any stamp duty … but that’s really splitting hairs at that stage
I wouldn’t dismiss the ETF route, as although there is the WHT, it spreads your eggs more efficiently than a DIY approach and I would personally just treat the WHT as a cost of doing business and simplicity. Consider it the only platform charge that has to be paid per year.
It is worth reading about synthetic S&P 500 trackers which can avoid the US withholding tax on dividends
"Foreign investors in US stocks are generally subject to a withholding tax on dividends of up to 30%, although many can reduce this to 15% through the application of tax treaties. However, under US tax law, namely the HIRE Act 871m, swaps written on indices with deep and liquid futures markets, e.g. the S&P 500, are not required to pay withholding taxes on dividends.
This means that while a European-domiciled physically replicating S&P 500 ETF will generally be able to achieve a maximum of 85% of the dividend yield, a synthetic fund can theoretically achieve up to 100% of the full gross dividend amount. With the S&P 500 yielding around 1.9% (2% on average over the past decade), this exemption means synthetic funds can potentially achieve up to 30 basis points of additional performance each year."
There are some synthetic S&P 500 trackers on the Trading 212 platform: eg SPXP. We can see in the below statistics that it has indeed outperformed VUSA by a small amount.
I like the script idea, spamming shares under £1, a very neat thought. That’s probably something a more technically oriented reader might want to take a look at, but as a total tech numpty it’s beyond my pay grade. Thanks for your input and I will take on board your comment about “cost of doing business”. I’m still going to try and reduce those costs as much as I practically can though.
That is exactly what these synthetic ETFs acheive. You question is very topical. I recall @rjh68 asking for the new iShares S&P 500 Swap UCITS ETF (I500) to be added to the platform.
BlackRock launches synthetic S&P 500 ETF. Driven by increasing client demand for synthetic replication with US equities. Synthetic ETFs, such as I500, do not pay withholding tax on dividends as the substitute basket of the ETF is restricted to non-dividend paying stocks. Meanwhile, physical ETFs domiciled in Luxembourg pay 30% withholding tax on US equity dividends while Irish-domiciled ETFs pay 15%.
Hi Investing Leaders, a question on similar lines. I am looking to make a US dividend portfolio consisting of a small number of US stock (trading in $). The portfolio would contain 4-10 US stocks. Now my questions are -
Do i have to fill some paperwork to reduce the withholding tax on dividends from 30% down to 15% (I am a UK resident)? Or does T212 does this for me automatically? I will operate this portfolio from a ISA account (although withholding tax is from the US govt, so this will not be exempt from taxation).
Is the dividend paid in my account be automatically 15% tax deducted?
Will I get my dividend pay in $ or ÂŁ? My T212 account is in ÂŁ.
Sorry if I am reviving an old thread, but could someone explain this to me please?
I understand that US withholding tax of 15% is applicable to dividends received on US stocks even in an ISA account. Couple of dividends received in the past for QCOM and BKE have been credited after deduction of 15%, which means that W-8BEN has been applied to my account. However, today I have received a dividend for TRP (TC energy) @ 0.54c/share and dividend declared was 0.81c. That works to be more than even 30%, am I missing something here?
I have checked that TRP is a corporation and not an MLP (apparently MLPs distribution works differently). Also the dividend credited is classed as return on capital rather than ordinary dividend, does that make a difference?
And for UK tax purposes is a return on capital payment received treated as dividend or capital gain?
Yes, I have read that guidance, but thanks anyway.
My main question in the above example of TRP is as to why is the withholding tax deducted @30% rather than 15%. The whole idea of w-8ben is to reduce US withholding tax from standard 30% to 15% for UK residents. Note that the currency fluctuations don’t matter bcos we are just talking in dollar cents above.
Could this be because what you have received is not classified as a dividend? The UK-US Treaty rate of 15% withholding, reduced from a standard rate of 30%, applies only to ordinary dividends.
ARTICLE 10 Dividends
Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident and according to the laws of
that State, but if the dividends are beneficially owned by a resident of the other
Contracting State, the tax so charged shall not exceed, except as otherwise provided,
(a) 5 per cent. of the gross amount of the dividends if the beneficial
owner is a company that owns shares representing directly or indirectly at least
10 per cent. of the voting power of the company paying the dividends;
(b) 15 per cent. of the gross amount of the dividends in all other cases.
This paragraph shall not affect the taxation of the company in respect of the profits
out of which the dividends are paid.
That could be the possible explanation though I’m not 100% sure. However yesterday I received 2 dividend payments on US stocks and those were deducted @15% so maybe that’s the explanation. Thanks for your responses Richard.
Annoying isn’t it. It’s almost as though the US government don’t want you to invest there.
Fortunately, many US companies prefer not to pay dividends and find useful ways to reinvest profits and expand the company. Choose those.
An extract from a popular magazine… I’m confused by the fact that a form needs to be filled to pay 15% tax instead of 30%… does that affect all single shares within an ISA/GIA ? Also it mentioned no withholding tax on SIPP ?
T212 already fills the form for you and applies it automatically. And I think the form is valid for 3 years or so, so T212 will ask you to fill the form again in that period of time.
You don’t need to complete either form if you hold your investments in a SIPP. This is because when in a SIPP, US investments are automatically exempt from withholding tax. At T212 you currently do not have an option to open a SIPP (to my knowledge at least). So this does not applies in this current platform. You need to go to providers such as HL or AJ Bell to start your SIPP account.
Accumulating/capitalising ETFs
You’re liable for tax on dividends and interest as normal regardless of whether the ETF physically pays you income, or reinvests it back into the fund as with accumulating/capitalising ETFs.
Is this true ?
Also I was wondering if accumulating ETFs can re-invest all untaxed dividends back in the ETF ?
