How To Buy Foreign Shares

It can seem daunting to buy shares on a foreign stock exchange, particularly if you’re a relative newcomer to the stock market, but it really isn’t all that much harder than buying UK shares. But there a few things watch out for, in particular taxes and dealing costs. Here’s a summary:

Easy to deal

Most British-based stockbrokers, like for example the Fool’s own Share Dealing service, can easily buy and sell shares on foreign stock exchanges, and if you don’t have a foreign currency account they’ll produce your contract note in sterling. You tell them what you want to do and they’ll do all the work for you.

It’s a bit harder for British-based investors to deal in Australia, Japan and other Far Eastern markets because of the time difference, so deals are typically processed when the market next opens. But some online brokers will let you deal on these exchanges in the middle of the night.

However, many non-American companies are also listed on the New York Stock Exchange so you could instead get your broker to buy their shares on the NYSE.

Most brokers charge higher commission rates for placing deals on overseas exchanges. Furthermore it can be rather expensive to obtain a share certificate so most investors keep their shares in their broker’s nominee account. Check before you deal.

Foreign exchange risk

If you hold non-sterling assets then you’re exposed to foreign exchange risk. This means that if the value of that currency falls against sterling then the value of your shares also falls. But this works both ways; if sterling weakens against that currency then you’re better off.

You will also incur charges when converting sterling into other currencies, so if you regularly switch between currencies then this will eat into your returns. Check before you deal.

If you have a share certificate, expect foreign currency dividend cheques to turn up in the post. These can be very expensive to convert into sterling at your local bank because of their minimum commission charges. My foreign shareholdings are in brokerage accounts where dividends are either held in a foreign currency account or immediately converted to sterling at a relatively low cost.

Taxes

Not every foreign country charges stamp duty upon purchases and where they do it is usually at a much lower rate than the 0.5% that’s payable in the UK. One exception is Ireland which charges a whopping 1% stamp duty upon all share purchases.

When you get a dividend from a foreign company you’ll see that there has been a deduction for “withholding tax.” HM Revenue and Customs treats withholding tax as being equivalent to your UK basic rate income tax liability, so basic rate taxpayers don’t have to pay any more tax upon their foreign dividends if withholding tax has been taken. But higher rate taxpayers must pay additional tax upon foreign dividends, just like they do with their UK dividends.

It’s worth noting that the rates for withholding tax vary quite widely from country to country.

The problems with ISAs

Buying and selling foreign shares through an ISA can be surprisingly expensive. This is because you can’t hold foreign currency in ISAs so all foreign purchases and sales must be settled in sterling.

So if an investor is selling a foreign share in their ISA and then wants to reinvest the proceeds in another foreign share, they will be caught for two sets of foreign exchange costs; one for the sale and one for the purchase. These charges can take several percentage points from your investment, so it’s not something to be done regularly as it will seriously reduce your returns.

Dealing with Uncle Sam

If you want to buy American shares you need to send a completed W-8BEN form to your broker (normally they will be able to provide the form and show you how to complete it). If you don’t then your dividends and interest will suffer 30% withholding tax, rather than 15%, and some overzealous brokers may even keep back 30% of any sale proceeds if they haven’t got a W-8BEN.

You can reclaim the excess tax but be warned. This means dealing directly with America’s Internal Revenue Service so I’d recommend completing the W-8BEN to avoid having to make a reclaim. W-8BENs remain valid until the first 31 December that occurs after the third anniversary of you signing the form. So a form signed on 1 May 2015 would remain valid until 31 December 2018, and so on.

Investing via funds

Another way to invest in foreign companies, one which lets you avoid having to deal with foreign currencies and taxes, is via investment trusts and unit trusts which focus upon particular countries and regions of the world.

However, if you’re investing in funds like these you’re buying a collection of companies, rather than individual companies, so the proportion invested in any one company will be relatively small.

A few more bits

Many investors are put off owning shares in companies which are based in non-English speaking countries because of the language barrier. But this isn’t as much of a problem as you might think because a surprisingly large number of companies, especially those with interests in many countries, also publish their results and company news in English (it is the international language of business).

It’s relatively easy to see if a company does this by checking its investor relations website which is easily found through your favourite search engine. The company name and “investor relations” usually does the trick!

Whilst there are different accounting standards to deal with, those in the English-speaking nations are quite similar and for comparison purposes many foreign companies also produce a set of accounts which is in accordance with the International Accounting Standards Board guidelines.

Finally, the Fool also has a range of discussion boards devoted to overseas shares. These are well worth checking out if you want to swap ideas and experiences with like-minded Fools.


 

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