Interactive Brokers: domicile, insurance, taxes

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
Urgestein
Posts: 2
Joined: Thu Sep 10, 2020 9:10 am

Interactive Brokers: domicile, insurance, taxes

Post by Urgestein »

I have my life savings at Interactive Brokers. Suddenly I discovered that there are many issues that must be discussed. I tried to find some of the answers by contacting costumer support, but they haven't replied in weeks.

As you know, IB LLC is based in the US, but they own a subsidiary in the UK (IBUK). I am a national of an EU country, but I live outside the EU, the UK, and the USA. All of my assets are Irish-domiciled. I would be grateful for suggestions and information related to the following questions, which I'm sure must also affect a lot of other people.

Where is my broker account domiciled?

Are my purchases handled by IB LLC or by IBUK? Does this matter in practice?

Are my assets held by US custodians or by UK custodians?

This must have important practical implications that are difficult to foresee for me.

What kind of broker-failure insurance do I have?

American IB customers are covered by SIPC up to $500,000. But am I covered by the American SIPC, or by the UK FSCS? This matters a lot, because FSCS only insures up to 85,000 GBP.

The IB website says:
United Kingdom

Interactive Brokers (U.K.) Limited

Interactive Brokers (U.K.) Limited is authorised and regulated by the Financial Conduct Authority. FCA Register Entry Number 208159. Products are only covered by the UK FSCS in limited circumstances.

Your account is cleared and carried by Interactive Brokers LLC and for certain limited products by Interactive Brokers (U.K.) Limited. Interactive Brokers LLC is regulated by the US SEC and CFTC and is a member of the SIPC (www.sipc.org) compensation scheme. Interactive Brokers (U.K.) Limited is authorised and regulated by the FCA and regulated products are covered by the UK FSCS.
This suggests that my assets are covered by SIPC and not by FSCS. But how to make sure? What does it mean for an account to be 'cleared and carried'? Does this clearance and carriage entail that my assets are insured by SIPC? What are those 'certain limited products' that are 'cleared and carried' by IBUK?

Is it even possible that my savings aren't insured at all in the event that the broker goes bust?

UK taxation

The following questions only matter if my assets do turn out to be held in the UK.

I don't live in the UK, and anyway there's a more-than-sufficient capital-gains exemption of £12,300. So I guess I wouldn't pay capital gains tax. But what about taxes on interest and dividends? My ETFs are accumulating, but I don't think that matters in the UK.

The UK has an inheritance tax. If my assets grew enough to hit the limit, would I need to worry about it?
TedSwippet
Posts: 3099
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Interactive Brokers: domicile, insurance, taxes

Post by TedSwippet »

Welcome.

I'm not an IB customer, so I don't know some of the specifics, but I've put a few notes below that should help put your mind at ease.
Urgestein wrote: Fri Sep 11, 2020 5:44 am Are my purchases handled by IB LLC or by IBUK? Does this matter in practice?
Mostly not, but there is one combination to watch out for. If you hold a US brokerage account and live in a country without a US estate tax treaty, you want to avoid holding more than $60,000 in cash in a that account, because the US sees cash in a US broker as 'US situs', putting it at risk of confiscatory US estate taxes. In practice, a broker account is not the place to keep cash anyway, so that should be straightforwards to avoid (although you might need to take care not to die while rebalancing!).

Holding Ireland domiciled ETFs in a US broker account is fine; it is just cash that is the problem. Holding Ireland domiciled ETFs and cash in a non-US broker are both fine.
Urgestein wrote: Fri Sep 11, 2020 5:44 am Are my assets held by US custodians or by UK custodians? This must have important practical implications that are difficult to foresee for me.
I don't see it mattering as much as you might think. For tax, both estate and income, what is important is what you hold, not so much where or how you hold it.

If you hold US domiciled ETFs you could be at risk from confiscatory US estate taxes no matter where your broker or their custodian is on the face of the planet. Conversely, if you hold only non-US domiciled ETFs, the US cannot apply its estate tax to these, even if held in a US broker or custodian. Your heirs may have a long and drawn-out process to go through with a US custodian and the IRS before they can get access to your assets, but there would be no actual US estate tax to pay.
Urgestein wrote: Fri Sep 11, 2020 5:44 am American IB customers are covered by SIPC up to $500,000. But am I covered by the American SIPC, or by the UK FSCS? This matters a lot, because FSCS only insures up to 85,000 GBP.
I guess only IB can tell you for sure. I don't want to sweep this concern away entirely, but overall it seems that the risk of actual losses here is a lot lower than many people suspect. Brokers must ring-fence client assets, so that if the broker fails, goes bankrupt say, then client money and investments are safe.

Beyond this, there is the faint possibility of broker fraud -- you think you hold assets with them, but you don't -- but auditing and government oversight should prevent that. So these coverages exists only as a very last resort. And even for broker fraud, your chance of losing everything seems negligible. Say you invested £800,000 and the broker ran off with 10% of this -- an extreme and unlikely example -- the FSCS would cover your £80,000 loss.

I'm in the UK, and personally I do not worry about this. I do maintain more than one broker account, but only so that if one fails I will still have access to cash while the failed one is wound up. My own feeling is that the risk of real and large financial loss from broker failure is vanishingly remote, particularly when compared to all the other risks of investing.
Urgestein wrote: Fri Sep 11, 2020 5:44 am I don't live in the UK, and anyway there's a more-than-sufficient capital-gains exemption of £12,300. So I guess I wouldn't pay capital gains tax. But what about taxes on interest and dividends? My ETFs are accumulating, but I don't think that matters in the UK.
As a non-UK resident, you can ignore these UK taxes entirely. UK capital gains tax, income tax on dividends and interest, and the UK's 'notional' tax on accumulated dividends, only apply to UK residents. You will pay none of these, no matter how much you realise in capital gains or receive in interest and dividends. Of course, you may well however face these taxes in your own country of residence.
Urgestein wrote: Fri Sep 11, 2020 5:44 am The UK has an inheritance tax. If my assets grew enough to hit the limit, would I need to worry about it?
No. Again, it is what you own, not how or where you own it. And you are not a UK resident. You hold Ireland domiciled ETFs, and just as they are not US situated assets, they are also not UK situated assets. They are shares in Irish corporations, so they are Ireland situated.

If you are not resident there, Ireland will not attempt to apply any of its own taxes to you either. Irish tax laws have some special exemptions for Ireland domiciled ETFs, which make them completely 'tax transparent' when held by non-Irish investors.
Last edited by TedSwippet on Sun Sep 13, 2020 3:02 am, edited 2 times in total.
DJN
Posts: 732
Joined: Mon Nov 20, 2017 12:30 am

Re: Interactive Brokers: domicile, insurance, taxes

Post by DJN »

Hi,
where are you a tax resident and where are you domiciled?
That would be helpful for some important details.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
Urgestein
Posts: 2
Joined: Thu Sep 10, 2020 9:10 am

Re: Interactive Brokers: domicile, insurance, taxes

Post by Urgestein »

Thank you, TedSwippet. I think this clears up most of my worries for now.

DJN, that's not likely to change much in this connection.
occambogle
Posts: 482
Joined: Thu Dec 12, 2019 4:58 am

Re: Interactive Brokers: domicile, insurance, taxes

Post by occambogle »

I was able to confirm the location/entity of my IB account (US, which i wanted as am US expat) via customer service online chat. I just told them I needed to know where my account was physically located due to various tax and regulatory issues.
I've found the online chat fairly helpful to be honest... though I find sometimes it's better during US market hours.
User avatar
galeno
Posts: 2100
Joined: Fri Dec 21, 2007 12:06 pm

Re: Interactive Brokers: domicile, insurance, taxes

Post by galeno »

I wish IB had the phone customer service skills of Schwab.

If Schwab International gave us access to UCITS ETFs on non-USA bourses we'd switch back to Schwab yesterday.
KISS & STC.
Post Reply