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Foreign shares in an ISA

You can hold US shares in an ISA, and other foreign shares, too.

Many investors seem to be confused about whether you can hold foreign shares in ISAs.

The answer is simple: You can!

According to HMRC, you can hold foreign shares in an ISA as long as the shares are in a company listed on “a recognised stock exchange anywhere in the world”.

HMRC doesn’t specify exactly what it means mean “recognised”, so you may have trouble if you want to snap up some Mongolian-listed bargains.

But shares listed on the New York Stock Exchange, NASDAQ, German companies listed on the DAX, and shares traded on the other big markets around the world are all eligible.

The same rule holds for corporate bonds issued by overseas companies.

To be clear, I’m talking about stocks and shares ISAs here, specifically the ‘self-select’ variety that enable you to buy and sell whatever shares, ETFs, bonds, or any other permitted investments you want.

Many investors choose to get overseas diversification through index or managed funds, where they buy the collective fund through the manager, and they’re fine, too. New country-specific ETFs are being launched all the time.

The only stipulation is that such a fund must be recognised by the Financial Services authority to qualify for holding in an ISA. Anything you or I need (or should) invest in will qualify.

Investing in foreign shares

There are a few other complications to be aware of when investing in overseas shares in an ISA.

Broker discretion

Your particular broker may not enable you to buy or sell overseas shares on any or all major stock exchanges, even if you are legally allowed to hold them in your ISA. Or you may need to fill in forms to do so. For instance, all the brokers I use insist I fill in a W-8BEN form to trade US stocks.

Currency risk

Buying and holding overseas shares exposes you to currency risk. This can be a positive or negative depending on how the UK pound performs, and as such it additionally diversifies your portfolio in currency terms, as well as the potential diversification you’re getting from the performance of different stock markets around the world.

Withholding tax / double taxation

Holding overseas shares exposes you to tax complications, even in an ISA. We’ve written the definitive article on withholding tax, so go check it out. The key takeaway is usually you can avoid being taxed twice if you find and fill in the correct form. For instance, the W-8BEN form allows UK investors to pay a lower rate of US tax (15% instead of 30%) on dividend income from US shares.

Higher dealing costs, but no stamp duty

Brokers usually charge you more to buy and sell overseas shares – even shares listed on very liquid markets like the NYSE. But the good news is most other territories don’t charge stamp duty when you buy shares, saving you 0.5%.

Have ISA, will travel

The big restriction for UK private investors looking to invest in shares in an ISA remains the ban on companies that trade on the AIM market.

This ban holds despite lobbying that the restriction is no longer valid, given the changes to capital gains tax treatment of AIM shares – and the fact that you can hold AIM shares in a Self-Invested Personal Pension.

But as for buying and holding foreign shares in an ISA, the world is your oyster!

 

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{ 16 comments… add one }
  • 1 Stuart August 25, 2011, 9:36 am

    I have just started reseaching into passive investing for my retirement fund. This website is a great resource especially since most books are US centric.
    Quick question: What is the best ‘self select’ stocks and shares ISA on the market at the moment?

  • 2 The Investor August 25, 2011, 10:39 am

    @Stuart – Thanks, glad you’re enjoying the site!

    There isn’t really a ‘best’ self-select stocks and shares ISA out there at the moment, since it all depends on your specific needs, and they have very convoluted dealing/admin structures.

    If you’re investing in passive funds however, you shouldn’t be doing much trading — and indeed you can do a lot by using a fund platform to invest in funds (as opposed to ETFs) that will avoid dealing costs all together (though look out for other charges).

    Try this link:
    http://monevator.com/2011/05/31/choosing-a-investment-platform/

    I’d definitely use an ISA, even if it costs you £25 a year or similar and you don’t see an immediate tax benefit. It’s worth it in my opinion in the long run.

  • 3 Alex August 25, 2011, 4:34 pm

    Some ISA accounts don’t charge anything for the ISA wrapper – Interactive Investor (www.iii.co.uk), for example.

  • 4 Stuart August 25, 2011, 6:27 pm

    The one thing I am confused about is if you open an ISA with Interactive Investor for example does that mean that you would be unable to invest in funds through other companies, such as the Vanguard indexs available through alliance. Are you restricted to using one fund manager or online broker?

  • 5 Ben August 25, 2011, 6:37 pm

    i have an ISA with HL which is free cos I’ve only bought funds

    (note they would charge if I held stocks,ETFs or the like at 0.5% capped at £45pa)

    i also have a iii which i’m going to use to set up an ETF portfolio at some point. for my paltry savings though the 1.50 monthly charges are still too much

    i’m also thinking that I’ll have an alliance trust ISA, £25pa inc. 1 trade just so I can invest in Vanguard. I’d only trade once per year, possibly choosing a different product each time

  • 6 Ben August 25, 2011, 6:48 pm

    i *don’t think* you need to consider any other platforms than this apart from TD Waterhouse which I’ve heard a few people round here use

  • 7 Alex August 25, 2011, 8:55 pm
  • 8 The Investor August 25, 2011, 9:47 pm

    Hi Stuart,

    Only confused about one thing? You’re doing well — ISAs have been unnecessarily confusing since their inception, although they’re actually mildly less annoying then they used to be.

    Alex’s link should answer the question with respect to funds, but I wasn’t sure if you were actually asking about ISA providers.

    Basically, you can only put money into one cash ISA and one stocks and shares ISA in any particular year. The cash and stocks and shares ISA providers can be different, so you could have at most two providers (one doing your cash ISA, one your S&S ISA). You can invest up to the maximum ISA allowance for the year (a little over £10K currently, increased with inflation every year).

    Next year , you could choose to invest with a different ISA provider or platform, or you could use your new annual allowance to top up existing ISAs.

    There is no limit on how many different ISAs you can hold over time. They are also portable between providers, provided you *transfer* them (don’t cash them in and move the money, as that takes it outside the ISA wrapper!)

    Hope this helps!

  • 9 Faustus August 25, 2011, 10:25 pm

    Good post. I will say that the US tax system is an absolute nightmare and any sane person should avoid anything that results in having to try and reclaim witholding tax from the IRS.

    It is perverse that the ban on AIM stocks in an ISA remains. I’ve always wondered whether HMRC’s real objection is that the volatility of these shares means one is more likely to end up with huge capital gains and they don’t want to lose tax revenue from that. On the other hand one would have thought the riskiness of AIM shares should also result in deeper capital losses which would offset those gains.

  • 10 ermine August 26, 2011, 8:51 am

    > Are you restricted to using one fund manager or online broker?

    although yes, in any one year, you can take a strategic view and open a ISA with one firm one year that is good for shares and another the next year that is good for funds. I used to have a L&G ISA with their funds in in and a iii ISA with shares. I now exclusively use the latter, which is fine for index funds but a little bit dear for managed funds compared to H&L f’rinstance.

    Unfortunately, even if you have two accounts you can only add money to one of them in any tax year – add 50p to the wrong one in April and you’re done for till next March

  • 11 Ben August 26, 2011, 1:38 pm

    you may be able to utilise family members to increase options

    i have a similar annoyance with a stray £40 going into iii this year scuppering my other options

    does anyone know if you can transfer an index fund from outside an ISA into an ISA so long as its worth less than the ~£5000 limit?

    e.g. could i buy now outside an ISA then move it across next april?

  • 12 The Money Grower August 26, 2011, 5:46 pm

    Totally agree about AIM shares. I don’t understand the rationale behind not allowing them in ISA’s either.

    TMG

  • 13 Lemondy August 26, 2011, 11:01 pm

    “add 50p to the wrong one in April and you’re done for till next March”

    That’s not right: you can transfer your “current year” allowance between providers. It’s even possible to subscribe to your full cash ISA allowance with provider X, transfer that into an S&S with provider Y, and then subscribe to your full cash ISA allowance with provider Z, all within the same year.

    http://www.hmrc.gov.uk/isa/transfer-isa.htm

  • 14 Ben August 27, 2011, 5:06 pm

    @lemondy

    Thanks very much for that. Very useful

  • 15 Singhini February 21, 2015, 2:46 am

    Am I right to think that when this April come around that I can open a self-select ISA with lets say HL and buy £2,000 worth of US shares in Company X at lets say $0.15 a share (i.e. 10p each giving me 20,000 shares) and then dump the rest of my ISA allowance (approx. £13,240) into a cash ISA (lets say HSBC)

    And then in 20 years time my 20,000 shares in the US company are now worth the equivalent of £15.00 each I would have £300,000 tax free ?

  • 16 phil September 16, 2015, 6:58 pm

    Does anyone have a suggestion which broker to use for investing US shares within an ISA? Am looking at TD direct or HL – TD appear to just charge £12.50 per trade? where as HL charge a 1.5% spread…?

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