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.
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.
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!