Question
Since the take-over of Cadbury plc by Kraft Foods of America, I now hold some Kraft shares in my ISA portfolio. Please would you explain the implcations of retaining these foreign shares.Answer
Holding foreign shares within an individual savings account (ISA) is much the same as holding shares listed on the London Stock Exchange, with three potential differences: trading fees, currency and withholding tax.
Kraft shares are traded in US dollars on the New York Stock Exchange. This means that movements in the pound/dollar exchange rate will affect the value of your investment – in much the same way when buying foreign currency for holidays, but in reverse. For example, $1,000 of shares would be worth £625 at an exchange rate of $1.60 to £1. If the dollar falls to $2 to £1 the shares would only be worth £500.
Dividends will also be paid in US dollars. You should check whether your stockbroker charges to convert these back to pounds – ideally the conversion should be fee-free and carried out at an institutional exchange rate to ensure you get a good deal.
US dividends will also be paid net of a 30% withholding tax. Under the 2001 US/UK Double Taxation Treaty you should be able to reclaim 15%, so that you pay no more than 15% tax on the dividend (ignoring any UK higher rate liability you might have if the shares are held outside of an ISA). However, this requires your ISA manager to process a US W-8BEN tax form – I don’t think all managers offer this facility so this is something else to check with your stockbroker.
Finally, most stockbrokers charge higher dealing fees for overseas shares versus those on the London Stock Exchange, so you could find yourself paying more to sell the Kraft shares than you would have done to sell Cadbury shares.
Since the take-over of Cadbury plc by Kraft Foods of America, I now hold some Kraft shares in my ISA portfolio. Please would you explain the implcations of retaining these foreign shares.Answer
Holding foreign shares within an individual savings account (ISA) is much the same as holding shares listed on the London Stock Exchange, with three potential differences: trading fees, currency and withholding tax.
Kraft shares are traded in US dollars on the New York Stock Exchange. This means that movements in the pound/dollar exchange rate will affect the value of your investment – in much the same way when buying foreign currency for holidays, but in reverse. For example, $1,000 of shares would be worth £625 at an exchange rate of $1.60 to £1. If the dollar falls to $2 to £1 the shares would only be worth £500.
Dividends will also be paid in US dollars. You should check whether your stockbroker charges to convert these back to pounds – ideally the conversion should be fee-free and carried out at an institutional exchange rate to ensure you get a good deal.
US dividends will also be paid net of a 30% withholding tax. Under the 2001 US/UK Double Taxation Treaty you should be able to reclaim 15%, so that you pay no more than 15% tax on the dividend (ignoring any UK higher rate liability you might have if the shares are held outside of an ISA). However, this requires your ISA manager to process a US W-8BEN tax form – I don’t think all managers offer this facility so this is something else to check with your stockbroker.
Finally, most stockbrokers charge higher dealing fees for overseas shares versus those on the London Stock Exchange, so you could find yourself paying more to sell the Kraft shares than you would have done to sell Cadbury shares.
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