Tax implications of investing through London Stock Exchange for non-resident investors

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
pcabraham
Posts: 16
Joined: Mon Dec 03, 2007 4:39 pm

Tax implications of investing through London Stock Exchange for non-resident investors

Post by pcabraham » Tue Jun 13, 2017 2:53 am

I am a Singapore citizen and live in Singapore. I have been considering investing in Irish domiciled ETFs through the London Stock Exchange - specifically the iShares Core MSCI World UCITS ETF (IWDA). However, I have not been able to find good information on the tax implications of this. Specifically, the question I have is this - what are the tax implications (income tax, capital gains tax, estate duties) of investing in Irish domiciled ETFs through the London Stock Exchange for investors who are not UK residents?

The research I have done suggests that there is a 15% withholding tax on dividends, there is no capital gains tax, and estate duties at 40% are levied on the portion of the estate exceeding GBP 325,000 in value. Is this correct? If any of you have dealt with this issue and have any insights, I would appreciate your thoughts.

msk
Posts: 1094
Joined: Mon Aug 15, 2016 10:40 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by msk » Tue Jun 13, 2017 4:20 am

IWDA is accumulative and does not pay dividends, hence any dividend tax that is paid by iShares within each sub-holding of shares in numerous jurisdictions worldwide is never available to you anyway. For you, No dividends, No income tax. I have recently sold a large chunk of IWDA with a profit and so far I have not heard any mention of capital gains tax. Of course I can only be sure I have nil tax liability after a full annual cycle. Like you, I live in a jurisdiction that has neither capital gains tax nor personal income tax. I hold IWDA via Internet Brokers and via Baader Bank in Germany. Because IWDA is not situs in the USA and I am neither a US citizen nor a US resident, nor a UK domiciled, nor a UK resident I do not see how a USA or a UK inheritance tax would apply to me. I believe that IWDA is in fact Ireland situs (see SWDA) though traded in the London and Amstredam stock exchanges, among others. Please explain why you are worried about UK inheritance tax. My understanding is that applies to stuff like if you own UK Real Estate or a business in the UK. You suspect that it also applies to shares (and cash in a bank account?). Never heard of that. My holding via Baader Bank is also, as far as I know, also shielded from German inheritance tax, if they have any. Perhaps check if you cannot simply purchase either SWDA or IWDA (same thing) directly on the Singapore Stock Exchange. The currency it trades in locally does not matter, even if it is Singapore $.

msk
Posts: 1094
Joined: Mon Aug 15, 2016 10:40 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by msk » Tue Jun 13, 2017 4:24 am

To insulate myself further from any smell of inheritance tax, my IB account is jointly owned with my wife (with survivor rights). Her residency status is similar to mine.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Tue Jun 13, 2017 7:32 am

pcabraham wrote:...what are the tax implications (income tax, capital gains tax, estate duties) of investing in Irish domiciled ETFs through the London Stock Exchange for investors who are not UK residents?
None, none and none. The UK does not tax dividends paid to non-residents, nor does Ireland. No UK or Irish capital gains tax. And UK and Irish inheritance taxes would not apply here to non-residents of those countries.
pcabraham wrote:The research I have done suggests that there is a 15% withholding tax on dividends, there is no capital gains tax, and estate duties at 40% are levied on the portion of the estate exceeding GBP 325,000 in value. Is this correct?
Happily no, this isn't right. The US applies its estate tax to its own country's funds and domiciled ETFs when held by non-residents. But other countries do not, UK and Ireland included. So again, no UK or Irish estate/inheritance tax worries for this case, then.
Last edited by TedSwippet on Sat Sep 09, 2017 2:15 pm, edited 1 time in total.

Caduceus
Posts: 1832
Joined: Mon Sep 17, 2012 1:47 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Caduceus » Tue Jun 13, 2017 10:06 am

You are subjected to three different tax regimes in the example you give. There is a 15% dividend tax for some of the stocks in the fund that you own, but it may not be immediately obvious to you. In your case, you are a citizen of Singapore who invests in a fund that is domiciled in Ireland, and that holds US stocks (let's just say the U.S. to simplify the analysis), so the U.S., Ireland, and Singapore each potentially takes a tax bite from your investments. That this is the London Stock Exchange is not relevant. What is relevant is the original domicile of the actual holding, the domicile of the investment "container", and your own tax residency status. The London Stock Exchange is just the market.

On the U.S. level, when dividends are paid out to the fund (even if the Irish-domiciled fund never pays them out to you but re-invests them), there is an actual dividend tax levied of 15% because that is the treaty rate that any Irish-domiciled investments are subjected to in relation to its holding of U.S. companies. So, if the fund holds 1,000,000 shares of Exxon Mobil, then 15% of (1,000,000 x 0.75) is paid to the U.S. every quarter. This process is largely invisible to you. If you were a U.S. citizen or a non-US resident alien holding the same 1,000,000 shares of Exxon Mobil in a IRA or 401k, you would pay no dividend tax. If you were a citizen of Singapore holding Exxon Mobil directly, a quick look at the tax treaty table shows you would have 30% of tax withheld from dividends at source (which also amounts to actual tax.) As for capital gains, U.S. generally does not levy capital gains on non-U.S. entities, so your Irish-domiciled fund would not incur capital gains tax bite when it buys and sells the fund.

On the Irish level, as far as I know, Ireland does not tax dividends or capital gains to non-resident investors, which is why there are so many Irish-domiciled funds.

And then, finally, you have to figure out how your home country (in your case, Singapore) taxes foreign dividends and capital gains. That, I don't know.

User avatar
Hyperborea
Posts: 793
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hyperborea » Tue Jun 13, 2017 10:46 am

This setup of holding Irish domiciled ETFs bought on the LSE using an account at Interactive Brokers (possibly a London based account) is what I'm planning to move into over the next couple of years as I expatriate from the US. Does anybody see any potential for Brexit to put an end to this? Will the loss of "passporting" rights stop those Irish ETFs being sold on the LSE? Are there other exchanges that work as well?
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Tue Jun 13, 2017 11:55 am

Hyperborea wrote:Does anybody see any potential for Brexit to put an end to this? Will the loss of "passporting" rights stop those Irish ETFs being sold on the LSE?
I can see the potential for it, but to be honest I can't imagine that Brexit negotiations wouldn't find a way to maintain the status quo for UCITS investment vehicles sold to UK retail investors. Worst case, I guess you would have to trade these ETFs through Euronext or SIX Swiss if they disappear from the LSE.

As far as I can tell that shouldn't affect any holding you have, though this is of course uncharted territory. (Also unplanned territory, from the look of thing from the UK side so far.) Shrug.

Are you moving to the UK (or another country with equivalent US income tax and US estate tax treaties)? If yes, you could also use US domiciled ETFs without issues, since the UK/US tax treaties provide you with comparable US tax rates on dividends and decent insulation from US estate taxes. This isn't the case for the OP -- Singapore has no tax treaties with the US.

User avatar
Hyperborea
Posts: 793
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hyperborea » Wed Jun 14, 2017 1:32 am

TedSwippet wrote:Are you moving to the UK (or another country with equivalent US income tax and US estate tax treaties)? If yes, you could also use US domiciled ETFs without issues, since the UK/US tax treaties provide you with comparable US tax rates on dividends and decent insulation from US estate taxes. This isn't the case for the OP -- Singapore has no tax treaties with the US.
I'll be spending 2-5 years in Japan and then probably (though fuzzier since it's further away) a fair bit of time based in Portugal. Neither of which has a newer style estate tax treaty with the US. Also, I can avoid paying taxes on earnings kept outside of Japan for up to 5 years which is the max I'll be staying. Portugal allows certain kinds of earnings to be tax free in Portugal for up to 10 years (non-habitual resident). Given that I don't want to be paying US tax that I don't have to nor be potentially subject to US estate tax (or have my wife in that situation).

The current Irish domiciled ETFs sold on the LSE fits the bill perfectly but I've been a bit worried that the May-bot may bodge that up.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Topic Author
pcabraham
Posts: 16
Joined: Mon Dec 03, 2007 4:39 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by pcabraham » Thu Jun 15, 2017 3:11 pm

I was able to talk to a financial advisor who has put his clients into Ireland domiciled ETFs and was therefore able to provide authoritative answers to the questions I had. His view is that, as long as you are not resident in either Ireland or the UK, you will not be liable to income tax, capital gains tax or estate duty if you invest in Ireland domiciled ETFs through the London Stock Exchange.

If you are not a tax resident of Ireland, you will not be liable to UK income tax on any dividends. The fact that you are buying the ETFs through the London Stock Exchange will not affect this. The UCITS rules allow ETFs to be sold through any European stock exchange.

UK Capital Gains tax will apply only if you are tax resident in the UK which might be the case if you have other assets there (such as property) or have been resident there in the past. If you are not resident in the UK, this is not an issue.

Similarly, you would not be liable for estate duties in the UK as long as you were not domiciled there.

He also did not feel that Brexit would affect any of that since, if the UK imposes any taxes on non-resident investors, it will damage its position as a financial hub.
Last edited by pcabraham on Thu Jun 15, 2017 4:15 pm, edited 1 time in total.

imperia
Posts: 145
Joined: Tue Feb 21, 2017 6:31 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by imperia » Thu Jun 15, 2017 3:56 pm

Hyperborea wrote:This setup of holding Irish domiciled ETFs bought on the LSE using an account at Interactive Brokers (possibly a London based account) is what I'm planning to move into over the next couple of years as I expatriate from the US. Does anybody see any potential for Brexit to put an end to this? Will the loss of "passporting" rights stop those Irish ETFs being sold on the LSE? Are there other exchanges that work as well?
Exchanges in Frankfurth, Amsterdam, Milano.
If you use IB iz is cheaper to use this exchange, especially if you use Euro.

Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Thu Sep 07, 2017 8:07 pm

Hi All. Google brought me here, and I think there are some important inaccuracies in the above replies, so let me give my 2c.

Non-UK domiciled persons are subject to UK inheritance tax on their UK-situated assets (similar to the US estate tax on "US-based" assets that applies to NRAs). Being a non-resident, non-UK-domiciled person means that rather than your whole estate, only your UK assets are taxed (and there are exemptions). So Irish ETFs would apparently be exempt if their registration of title occurs outside the UK. It is not generally true that persons who are not residents of the UK are exempt from UK inheritance tax. And you can also be a non-UK resident and still considered UK-domiciled for tax purposes (in case you were a resident in the past, and possibly in other cases I'm not aware of).

Here is the opinion of Mr. Lee Hudnam, a chartered accountant and a Chartered Tax Advisor:
As a non UK domiciliary you would only be subject to UK Inheritance tax ('IHT') on assets situated in the UK. Identifying the location of assets can be complex however the general rule is that a shareholding in a Company is located at the place where the title of ownership must be registered. Therefore it is the location of the share register that is crucial. On the assumption that the shares in your case are UK registered the value of the shareholdings (above the nil rate band) would be subject to UK inheritance tax.

Note however that there are special rules for overseas OEIC's and authorised investment trusts that can deem investments in these to be non UK situated for UK Inheritance tax purposes.
https://www.wealthprotectionreport.co.uk/public/804.cfm

This is from Her Majesty's government:
If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.

It’s not paid on ‘excluded assets’ like:

- foreign currency accounts with a bank or the Post Office
- overseas pensions
- holdings in authorised unit trusts and open-ended investment companies
https://www.gov.uk/inheritance-tax/when ... he-uk-dies

Here is advice pertaining to South African investors (yes, they generally have to pay inheritance tax on LSE-listed stocks)
https://www.moneyweb.co.za/mymoney/mone ... us-shares/

I am not a lawyer.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Fri Sep 08, 2017 3:18 am

Hortense wrote:
Thu Sep 07, 2017 8:07 pm
Hi All. Google brought me here, and I think there are some important inaccuracies in the above replies, so let me give my 2c.
Thanks for taking the time to comment.

Overall, your findings confirm that non-UK and non-Irish investors who hold Ireland domiciled ETFs purchased through the London stock exchange will not suffer any form of UK or Irish inheritance, estate, dividend, or capital gains taxes.

This cannot necessarily be said for cases that go outside this boundary though -- direct investment in shares in UK companies might expose one to UK inheritance tax. But for index fund or ETF investors outside of the few countries that possess a US estate tax treaty, the position of Ireland domiciled ETFs is a good one, and certainly much better than investing through US domiciled ETFs.

Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Sat Sep 09, 2017 1:27 pm

Update: I've found it! Irish funds, as opposed to stocks, are tax-exempt when held by and transferred to non-residents of Ireland:
Transfers in units in Irish funds are exempt from Irish stamp duty. A gift or inheritance between foreign residents of units in an Irish fund is exempt from capital acquisitions tax (i.e. gift and inheritance tax).
http://www.algoodbody.com/insightspubli ... n_of_funds

Thanks for the discussion, it prompted me to keep digging until I found the answer.

I think you can disregard the rest of this long reply.

-------------------------------------
TedSwippet wrote:
Fri Sep 08, 2017 3:18 am
Hortense wrote:
Thu Sep 07, 2017 8:07 pm
Hi All. Google brought me here, and I think there are some important inaccuracies in the above replies, so let me give my 2c.
Thanks for taking the time to comment.

Overall, your findings confirm that non-UK and non-Irish investors who hold Ireland domiciled ETFs purchased through the London stock exchange will not suffer any form of UK or Irish inheritance, estate, dividend, or capital gains taxes.

This cannot necessarily be said for cases that go outside this boundary though -- direct investment in shares in UK companies might expose one to UK inheritance tax. But for index fund or ETF investors outside of the few countries that possess a US estate tax treaty, the position of Ireland domiciled ETFs is a good one, and certainly much better than investing through US domiciled ETFs.
I wish it were so. But as far as I can tell, inheritors are liable for Irish Capital Acquisitions Tax (CAT) on inheritance of Irish-situated assets, including the stocks of Irish companies, even when neither the deceased nor the inheritor is Irish resident. There is an exemption for spouses and a tax-free thresholds for everybody else, depending on the relation between the deceased and the inheritor. "Group A" beneficiaries, including children of the deceased, enjoy a tax-free threshold of 310,000 Euro. Above that, you apparently have to pay 33%. See e.g. Deloitte's "Taxation and Investment in Ireland 2017":
Gifts or inheritances of Irish-situated property remain within the charge to
CAT, regardless of the domicile or residence of the donor/deceased or beneficiary. Shares in Irish-
incorporated companies constitute Irish property for this purpose.
Also, from Deloitte's "International Estate and Inheritance tax Guide 2013":
With respect to gifts and inheritances received on or after 1 December 1999, a charge to CAT arises when:
• The disponer is resident or ordinarily resident in Ireland; or
• The beneficiary is resident or ordinarily resident in Ireland; or
• The gift or inheritance consists of Irish situate property.
If any one of these conditions is fulfilled, the gift or inheritance is within the charge to CAT.
This seems to be the rule rather than the exception: states with inheritance or estate tax charge non-residents on assets in those states. This seems to be the case in the US, the UK, Ireland, and France, at least.

The Irish Vanguard funds' prospectus claims there is some exception to this rule, however:
Irish capital acquisitions tax (at a rate of 33%) can apply to gifts or inheritances of Irish situate assets
or where either the person from whom the gift or inheritance is taken is Irish domiciled, resident or
ordinarily resident or the person taking the gift or inheritance is Irish resident or ordinarily resident.
The Shares could be treated as Irish situate assets because they have been issued by an Irish
company. However, any gift or inheritance of Shares will be exempt from Irish gift or inheritance tax
once:
1.
the Shares are comprised in the gift or inheritance both at the date of the gift or inheritance
and at the “valuation date” (as defined for Irish capital acquisitions tax purposes);
2.
the person from whom the gift or inheritance is taken is neither domiciled nor ordinarily
resident in Ireland at the date of the disposition; and
3.
the person taking the gift or inheritance is neither domiciled nor ordinarily resident in Ireland at
the date of the gift or inheritance.
(from the prospectus of Vanguard Investment Series Plc).

I have failed to locate an authoritative source for the existence of this exemption, however, and I don't fully understand what this legalese means. The Irish government helpfully provides a list of CAT exemptions here. Of which, the most pertinent at first glance seems to be the Business Relief, which reduces the taxable value of certain business properties by 90% - which should often bring the value of the inherited property below the beneficiary's threshold.

Alas, quoted shares usually do not qualify for the Business Relief, according to the Irish Govt's "Tax and Duty Manual - Business Relief". So I don't know where Vanguard got their theory that shares in their funds are exempt. I remain unconvinced that Irish ETFs held by non-Irish residents are exempt from inheritance tax.

Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Sat Sep 09, 2017 1:53 pm

And here it is from the Irish government:
CATCA 2003 s.75 provides an exemption from tax for gifts and inheritances of Units
of certain investment entities. Units held in collective investment schemes, common
contractual funds, investment limited partnerships or investment undertakings are
exempt from tax in cases where neither the disponer nor the donee or successor is
domiciled or ordinarily resident in the State.
www.revenue.ie/en/tax-professionals/tdm ... art23.pdf

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Sat Sep 09, 2017 2:29 pm

Hortense wrote:
Sat Sep 09, 2017 1:53 pm
And here it is from the Irish government...
Thanks for the update.

To sum up, non-UK and non-Irish investors suffer no UK or Irish dividend taxes, estate taxes, inheritance taxes, gift taxes, transfer taxes, capital acquisition taxes, capital gains taxes, or stamp duty reserve taxes(*) when buying, holding, dying while holding(!), or selling Ireland domiciled ETFs(**) on the London stock exchange.

(*) Did I miss any possible taxes out? Governments in general are really good at inventing new ones. You only have to look away for a second for another to appear from nowhere.

(**) Typically, although not exclusively, Vanguard EU or iShares EU products.

Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Sat Sep 09, 2017 2:41 pm

Sounds about right, unless you consider the taxes their home country imposes on them, of course. I didn't know about the SDRT exemption. Too bad I'm not the ETF type. But it's good to learn.

Always passive
Posts: 338
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Always passive » Tue Oct 10, 2017 11:54 pm

A slightly different question:
Are there any transaction taxes, like Stamp Tax, when trading ETFs (in this case Irish ones) in the Swiss or London Stock Exchanges? A family member bought IUAA, the US Aggregate Bond ETF through the Swiss Exchange and HSBC shows price = $5.0823; however the transaction was booked at $5.09553. Let me mentioned that the account with HSBC is a flat total fee account (no per transaction broker fee)


Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Wed Oct 11, 2017 3:15 pm

Always passive wrote:
Tue Oct 10, 2017 11:54 pm
A slightly different question:
Are there any transaction taxes, like Stamp Tax, when trading ETFs (in this case Irish ones) in the Swiss or London Stock Exchanges? A family member bought IUAA, the US Aggregate Bond ETF through the Swiss Exchange and HSBC shows price = $5.0823; however the transaction was booked at $5.09553. Let me mentioned that the account with HSBC is a flat total fee account (no per transaction broker fee)
I don't know anything about the Swiss exchange. The internet tells me that the UK removed stamp duty on non-UK domiciled funds in 2007 [1,2] and on UK-domiciled ETFs on 2014.

There's also an Irish stamp duty, but it's not levied on Irish-domiciled ETFs, as noted above.

[1] - http://www.economist.com/node/9210577
[2] - https://www.lseg.com/areas-expertise/ou ... ducts/etfs

Hortense
Posts: 6
Joined: Thu Sep 07, 2017 7:34 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hortense » Wed Oct 11, 2017 3:21 pm

Swiss stamp duties are levied on each purchase and sale of shares, bonds, structured products, investment funds, ETFs and other securities.

...

Stamp duties on Swiss shares (Swiss ISIN): 0.075%
Stamp duties on foreign shares (non-Swiss ISIN): 0.15%
source: https://www.moneyland.ch/en/swiss-stamp ... definition

Always passive
Posts: 338
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Always passive » Fri Oct 13, 2017 8:19 am

Hortense wrote:
Wed Oct 11, 2017 3:21 pm
Swiss stamp duties are levied on each purchase and sale of shares, bonds, structured products, investment funds, ETFs and other securities.

...

Stamp duties on Swiss shares (Swiss ISIN): 0.075%
Stamp duties on foreign shares (non-Swiss ISIN): 0.15%
source: https://www.moneyland.ch/en/swiss-stamp ... definition

HSBC not only charged the 0.15% stap tax (they say that all Swiss banks are obligated to charge it) but also added what they called “external fees”. What is the meaning of external fees is a big unknown to me since the account is all fee included/flat 0.2% annual.

Valuethinker
Posts: 37588
Joined: Fri May 11, 2007 11:07 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Valuethinker » Sat Oct 14, 2017 6:29 am

Hyperborea wrote:
Wed Jun 14, 2017 1:32 am
TedSwippet wrote:Are you moving to the UK (or another country with equivalent US income tax and US estate tax treaties)? If yes, you could also use US domiciled ETFs without issues, since the UK/US tax treaties provide you with comparable US tax rates on dividends and decent insulation from US estate taxes. This isn't the case for the OP -- Singapore has no tax treaties with the US.
I'll be spending 2-5 years in Japan and then probably (though fuzzier since it's further away) a fair bit of time based in Portugal. Neither of which has a newer style estate tax treaty with the US. Also, I can avoid paying taxes on earnings kept outside of Japan for up to 5 years which is the max I'll be staying. Portugal allows certain kinds of earnings to be tax free in Portugal for up to 10 years (non-habitual resident). Given that I don't want to be paying US tax that I don't have to nor be potentially subject to US estate tax (or have my wife in that situation).

The current Irish domiciled ETFs sold on the LSE fits the bill perfectly but I've been a bit worried that the May-bot may bodge that up.
If you are an American citizen this strategy won't work?

The reason being PFIC rules-- the IRS will tax you on foreign funds in the worst possible way. And America taxes by citizenship, not country of residence.

Always passive
Posts: 338
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Always passive » Sat Oct 14, 2017 6:45 am

Valuethinker wrote:
Sat Oct 14, 2017 6:29 am
Hyperborea wrote:
Wed Jun 14, 2017 1:32 am
TedSwippet wrote:Are you moving to the UK (or another country with equivalent US income tax and US estate tax treaties)? If yes, you could also use US domiciled ETFs without issues, since the UK/US tax treaties provide you with comparable US tax rates on dividends and decent insulation from US estate taxes. This isn't the case for the OP -- Singapore has no tax treaties with the US.
I'll be spending 2-5 years in Japan and then probably (though fuzzier since it's further away) a fair bit of time based in Portugal. Neither of which has a newer style estate tax treaty with the US. Also, I can avoid paying taxes on earnings kept outside of Japan for up to 5 years which is the max I'll be staying. Portugal allows certain kinds of earnings to be tax free in Portugal for up to 10 years (non-habitual resident). Given that I don't want to be paying US tax that I don't have to nor be potentially subject to US estate tax (or have my wife in that situation).

The current Irish domiciled ETFs sold on the LSE fits the bill perfectly but I've been a bit worried that the May-bot may bodge that up.
If you are an American citizen this strategy won't work?

The reason being PFIC rules-- the IRS will tax you on foreign funds in the worst possible way. And America taxes by citizenship, not country of residence.
Thank you for your warning, which I was fully aware. The account belongs to a non US relative. I am a US citizen living offshore investing only in US based ETFs.

User avatar
Hyperborea
Posts: 793
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Hyperborea » Sat Oct 14, 2017 10:43 am

Valuethinker wrote:
Sat Oct 14, 2017 6:29 am
Hyperborea wrote:
Wed Jun 14, 2017 1:32 am
TedSwippet wrote:Are you moving to the UK (or another country with equivalent US income tax and US estate tax treaties)? If yes, you could also use US domiciled ETFs without issues, since the UK/US tax treaties provide you with comparable US tax rates on dividends and decent insulation from US estate taxes. This isn't the case for the OP -- Singapore has no tax treaties with the US.
I'll be spending 2-5 years in Japan and then probably (though fuzzier since it's further away) a fair bit of time based in Portugal. Neither of which has a newer style estate tax treaty with the US. Also, I can avoid paying taxes on earnings kept outside of Japan for up to 5 years which is the max I'll be staying. Portugal allows certain kinds of earnings to be tax free in Portugal for up to 10 years (non-habitual resident). Given that I don't want to be paying US tax that I don't have to nor be potentially subject to US estate tax (or have my wife in that situation).

The current Irish domiciled ETFs sold on the LSE fits the bill perfectly but I've been a bit worried that the May-bot may bodge that up.
If you are an American citizen this strategy won't work?

The reason being PFIC rules-- the IRS will tax you on foreign funds in the worst possible way. And America taxes by citizenship, not country of residence.
Correct, if one is a US citizen then this won't work. I am a green card holder and it won't work for one of those either until you give up the green card. There is a correct set of dance steps to make the move work correctly. There are scenarios where one can be considered to have given up the greencard by USCIS but not by the IRS. I will be expatriating and turning in the green card at the correct time after I arrive in Japan. After that I will move my investments into Irish domiciled ETFs sold on the LSE. I won't be holding these while I am a US tax resident.

The main point of doing this is to avoid the punitive US estate taxes levied against a non-resident alien. There is a meagre $40K exemption before the amount rises very quickly to 40% on all US situs property (property in the US - real estate, stock sold on the US exchanges, cash in a brokerage account or in a safe deposit but oddly not cash held in a bank account, etc.). Once I'm a non-US resident it makes no sense to hold US funds, ETFs, or stock - US tax law seems designed to force non-resident aliens to not directly own these.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Thu May 17, 2018 2:28 am

TedSwippet wrote:
Sat Sep 09, 2017 2:29 pm
Hortense wrote:
Sat Sep 09, 2017 1:53 pm
And here it is from the Irish government...
Thanks for the update.

To sum up, non-UK and non-Irish investors suffer no UK or Irish dividend taxes, estate taxes, inheritance taxes, gift taxes, transfer taxes, capital acquisition taxes, capital gains taxes, or stamp duty reserve taxes(*) when buying, holding, dying while holding(!), or selling Ireland domiciled ETFs(**) on the London stock exchange.

(*) Did I miss any possible taxes out? Governments in general are really good at inventing new ones. You only have to look away for a second for another to appear from nowhere.

(**) Typically, although not exclusively, Vanguard EU or iShares EU products.
Dear Ted,

I'm from Malaysia and new to ETF investing, but I have done a fair share of self-research. I'm in the midst of signing up with IB to invest in Irish domiciled ETF. To clarify account creation, i sent mail to IB staffs. They responded that as I'm Malaysian, my account can only be created under IB LLC, instead of IB UK.

My only concern is that if I buy Irish domiciled ETFs on LSE via IB LLC which is based in US, would I in any way incur US taxes? Right now, I presume that the only possibility of tax would be the 15% withholding tax which is already inherently deducted from the yield. Would the location of the broker (IB LLC which is based in US) play any part in additional taxation? Kindly advise. Thank you.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Thu May 17, 2018 7:41 am

Welcome.
vijaiananth wrote:
Thu May 17, 2018 2:28 am
My only concern is that if I buy Irish domiciled ETFs on LSE via IB LLC which is based in US, would I in any way incur US taxes? Right now, I presume that the only possibility of tax would be the 15% withholding tax which is already inherently deducted from the yield. Would the location of the broker (IB LLC which is based in US) play any part in additional taxation?
In order, "no", "yes", and "probably not, but you may need to be careful".

On your first two sentences... you would not face additional US dividend withholding tax by holding Ireland domiciled ETFs through a US broker, nor would you risk US estate taxes on these. You would (of course) find that the Ireland domiciled ETF has deducted 15% for US tax internally, but nothing new or unexpected there.

On the third, no US estate tax risk on holdings of Ireland domiciled ETFs. But... the US can apply its estate tax to cash holdings above $60k in a US broker (and yes, this is completely insane, but that is US tax law for you). So provided you do not hold that much in cash in IB you should be okay. A brokerage account is not the right place to hold cash anyway. (Do make sure not to die while rebalancing, though!)

No harm in checking all of the above with IB staff, of course.

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Sat May 19, 2018 1:24 am

TedSwippet wrote:
Thu May 17, 2018 7:41 am
Welcome.
vijaiananth wrote:
Thu May 17, 2018 2:28 am
My only concern is that if I buy Irish domiciled ETFs on LSE via IB LLC which is based in US, would I in any way incur US taxes? Right now, I presume that the only possibility of tax would be the 15% withholding tax which is already inherently deducted from the yield. Would the location of the broker (IB LLC which is based in US) play any part in additional taxation?
In order, "no", "yes", and "probably not, but you may need to be careful".

On your first two sentences... you would not face additional US dividend withholding tax by holding Ireland domiciled ETFs through a US broker, nor would you risk US estate taxes on these. You would (of course) find that the Ireland domiciled ETF has deducted 15% for US tax internally, but nothing new or unexpected there.

On the third, no US estate tax risk on holdings of Ireland domiciled ETFs. But... the US can apply its estate tax to cash holdings above $60k in a US broker (and yes, this is completely insane, but that is US tax law for you). So provided you do not hold that much in cash in IB you should be okay. A brokerage account is not the right place to hold cash anyway. (Do make sure not to die while rebalancing, though!)

No harm in checking all of the above with IB staff, of course.
Thank you very much Ted for taking time to answer my query. I take note on the $60k. My intention is to only buy shares worth $30k and park some minimal amount of cash (this minimal cash is for IB to auto-deduct my monthly IB inactivity fees, as I subscribe to buy-and-hold strategy and much less of a trader)

I'm afraid that IB staffs may not be well equipped to answer on tax implications. Anyway, that's simply my assumption. Nevertheless, I'll just ask them about it, no harm, as you rightly mentioned.

One more thing, as you mentioned about death of the investor, I believe that IB has Joint Tenants with Rights of Survivorship account, whereby if one of the account holder dies, the entire account shall automatically belong to the survivor. With respect to this, and speaking from my context (both my wife and I belong to non-US, non-UK, and non-Irish investor category and purchasing Irish domiciled ETF by being citizens and residents of Malaysia), I think that if I were to die, my wife will have legal ownership of the account without her being subjected to any taxes (except the internal 15% withholding tax). Kindly correct me if my understanding is not right.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Sat May 19, 2018 3:08 am

vijaiananth wrote:
Sat May 19, 2018 1:24 am
One more thing, as you mentioned about death of the investor, I believe that IB has Joint Tenants with Rights of Survivorship account, whereby if one of the account holder dies, the entire account shall automatically belong to the survivor. With respect to this, and speaking from my context (both my wife and I belong to non-US, non-UK, and non-Irish investor category and purchasing Irish domiciled ETF by being citizens and residents of Malaysia), I think that if I were to die, my wife will have legal ownership of the account without her being subjected to any taxes (except the internal 15% withholding tax). Kindly correct me if my understanding is not right.
You will not have any UK or Ireland problems. Neither applies their estate or inheritance taxes to non-residents. You might however run into problems with the US (of course!). From this article:
Non U.S. citizens should never own property as joint tenants

Under joint tenancy, when one joint tenant dies, the surviving joint tenant becomes the sole owner of the entire property. As such, under IRC Section 2056(d)(1), when one joint tenant dies and a non-citizen becomes the sole owner, the entire property is included in the decedent’s estate and becomes immediately subject to estate tax.
As usual, the defence is to either entirely avoid entanglements with the US, or at minimum keep your exposure below $60k.

It is also perhaps worth noting that even at levels below $60k and where there can be no US tax due, there is usually still a requirement to file an IRS form 706-NA non-resident alien estate tax return before the brokerage will release the funds. This can create long delays, on the order of a year at the IRS, and will be expensive to complete if you have to involve professionals (it requires notarised copies of death certificates and so on).

If you think all of this is utterly ridiculous, you are not the only one:
The U.S. estate tax imposed on NRAs today is an inefficient tax without serious policy justifications and it distorts behavior in ways that the estate tax imposed on residents does not. Also, this tax decreases the attractiveness of investments in the United States from the NRAs' perspective as it forces NRAs to invest in U.S.-situated assets using a foreign corporation. This insulates them from estate tax exposure and subjects them to additional costs and higher taxes that the U.S. Treasury does not necessarily benefit from.
Lose-lose rather than win-win, then.

msk
Posts: 1094
Joined: Mon Aug 15, 2016 10:40 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by msk » Sat May 19, 2018 5:35 am

Yes, you can open a Joint Account at IB with Survivor Rights. But you need some luck to have your spouse bother to learn and remember how to sign on! LOL. I tried to sort this out by having DW video how I signed on and then we keep the video on a thumb drive at a safe location. A better option is to set up a Username for DW at the time you open the account. Then she can use her own phone (for the two-factor authentication) and hopefully it may be easier for her to recall after you pop off to the wild blue yonder. Much easier than trying to add her with her own Username later. IB is not well known for a user friendly website. Try to sort out everything as you go through the fairly long procedure for opening the account. Our status currently: We have 3 Joint Accounts with Survivor Rights. DW can sign on for one. I can sign on for all 3 simultaneously (Linked Accounts). Still trying to unravel how DW can sign onto the other two and all 3 in a linked fashion. Think carefully what you wish each of you to be able to do, and set it all up that way from the time of opening the account(s). :greedy

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Mon May 21, 2018 8:09 am

Thank you both Ted and msk for sharing your pearls of wisdom. Having read your comments, I've decided to completely avoid myself from any scenario which may give rise to an US taxation. Hence, I'm abandoning my joint account idea and would rather be invested as an Individual. Both ways has its risk, but I would settle for individual account after weighing the scenarios.

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Mon May 21, 2018 9:48 am

TedSwippet wrote:
Sat May 19, 2018 3:08 am
vijaiananth wrote:
Sat May 19, 2018 1:24 am
One more thing, as you mentioned about death of the investor, I believe that IB has Joint Tenants with Rights of Survivorship account, whereby if one of the account holder dies, the entire account shall automatically belong to the survivor. With respect to this, and speaking from my context (both my wife and I belong to non-US, non-UK, and non-Irish investor category and purchasing Irish domiciled ETF by being citizens and residents of Malaysia), I think that if I were to die, my wife will have legal ownership of the account without her being subjected to any taxes (except the internal 15% withholding tax). Kindly correct me if my understanding is not right.
You will not have any UK or Ireland problems. Neither applies their estate or inheritance taxes to non-residents. You might however run into problems with the US (of course!). From this article:
Non U.S. citizens should never own property as joint tenants

Under joint tenancy, when one joint tenant dies, the surviving joint tenant becomes the sole owner of the entire property. As such, under IRC Section 2056(d)(1), when one joint tenant dies and a non-citizen becomes the sole owner, the entire property is included in the decedent’s estate and becomes immediately subject to estate tax.
As usual, the defence is to either entirely avoid entanglements with the US, or at minimum keep your exposure below $60k.

It is also perhaps worth noting that even at levels below $60k and where there can be no US tax due, there is usually still a requirement to file an IRS form 706-NA non-resident alien estate tax return before the brokerage will release the funds. This can create long delays, on the order of a year at the IRS, and will be expensive to complete if you have to involve professionals (it requires notarised copies of death certificates and so on).

If you think all of this is utterly ridiculous, you are not the only one:
The U.S. estate tax imposed on NRAs today is an inefficient tax without serious policy justifications and it distorts behavior in ways that the estate tax imposed on residents does not. Also, this tax decreases the attractiveness of investments in the United States from the NRAs' perspective as it forces NRAs to invest in U.S.-situated assets using a foreign corporation. This insulates them from estate tax exposure and subjects them to additional costs and higher taxes that the U.S. Treasury does not necessarily benefit from.
Lose-lose rather than win-win, then.
Btw Ted, you've mentioned that any cash holding of $60k may trigger estate tax. I just want to check my understanding on "cash holding":

Citing an example: My $30k worth ETFs grew to $100k worth ETFs after 30 years. Assuming that I would like to exit my position by liquidating my $100k worth ETFs and I was successful in doing so . At this juncture post-liquidization, I will have $100k cash holding in my IB account, before the money is wired to my Malaysian account. Does this "temporary" cash holding in IB due to liquidization incur estate tax too?

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Mon May 21, 2018 1:53 pm

vijaiananth wrote:
Mon May 21, 2018 9:48 am
Citing an example: My $30k worth ETFs grew to $100k worth ETFs after 30 years. Assuming that I would like to exit my position by liquidating my $100k worth ETFs and I was successful in doing so . At this juncture post-liquidization, I will have $100k cash holding in my IB account, before the money is wired to my Malaysian account. Does this "temporary" cash holding in IB due to liquidization incur estate tax too?
Yes. Of course, you would have to actually die while this $100k was in cash in the broker, and not (say) either wired out to a Malaysian (or any other) bank, or re-invested back into some other non-US domiciled ETF or fund. (And the broker would have to... ahem... know that you had died rather than, say, your wife or a relative logging in to the account as you and wiring out the funds before telling them...)

From this paper:
The U.S. estate and gift tax rules are technical and not obvious.
(Possibly the understatement of the century!)
U.S. SITUS PROPERTY: PROPERTY SUBJECT TO THE ESTATE TAX
...
4. Non Bank Deposits Cash accounts with U.S. brokerage firms are not considered bank deposits and are subject to the estate tax.

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Tue May 22, 2018 9:52 am

TedSwippet wrote:
Mon May 21, 2018 1:53 pm

Yes. Of course, you would have to actually die while this $100k was in cash in the broker, and not (say) either wired out to a Malaysian (or any other) bank, or re-invested back into some other non-US domiciled ETF or fund. (And the broker would have to... ahem... know that you had died rather than, say, your wife or a relative logging in to the account as you and wiring out the funds before telling them...)

From this paper:
The U.S. estate and gift tax rules are technical and not obvious.
(Possibly the understatement of the century!)
U.S. SITUS PROPERTY: PROPERTY SUBJECT TO THE ESTATE TAX
...
4. Non Bank Deposits Cash accounts with U.S. brokerage firms are not considered bank deposits and are subject to the estate tax.
Oh my...these impositions by the US seem to take the starch out from anyone entering into the investing territory

From your resourceful posts, I gather the below for nonresident alien hailing from non-treaty country:

Scenario 1: If one is comfortable to accept estate tax risk, one may proceed to invest >$60k. Estate tax only kicks in upon death. Accrued investment
amount minus $60k is subject to estate tax.

Scenario 2: If one is not comfortable with estate tax risk, one may keep the investment <$60k. Upon death, estate tax kicks in but since
there's an exemption up to $60k, that means no estate tax deduction effected.


I personally would go with Scenario 1.

By the way Ted, I read on another blog that the Irish domiciled ETFs (with underlying holdings of US companies) are registered in Ireland, and hence cannot be deemed an US situs property. As such, estate tax does not apply to Irish domiciled ETFs. This is a contradicting statement to one of your attachments on taxation (US estates and gift tax rules). What's your take on this?

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Tue May 22, 2018 11:30 am

vijaiananth wrote:
Tue May 22, 2018 9:52 am
Oh my...these impositions by the US seem to take the starch out from anyone entering into the investing territory.
Indeed. It is almost as if the US wishes to actively repel inward investment by foreigners, isn't it?
vijaiananth wrote:
Tue May 22, 2018 9:52 am
From your resourceful posts, I gather the below for nonresident alien hailing from non-treaty country: Scenario 1: If one is comfortable to accept estate tax risk, one may proceed to invest >$60k. Estate tax only kicks in upon death. Accrued investment amount minus $60k is subject to estate tax. Scenario 2: If one is not comfortable with estate tax risk, one may keep the investment <$60k. Upon death, estate tax kicks in but since there's an exemption up to $60k, that means no estate tax deduction effected.
Pretty much, though there are several ways around this.

Simplest is to use non-US domiciled funds or ETFs to stand between you and the actual US shares that you hold, and them either just make sure to never hold above $60k in cash in a US brokerage, or better still, use a non-US brokerage in the first place.

Another, although more expensive and more fiddly, is to use an intermediate 'holding company' set up by yourself and outside the US to hold these US shares. With the second, you have to be careful that the US cannot 'look through' the foreign company, but with care this is possible. This is the option to use if you want to hold something different from what non-US domiciled ETFs can offer, for example a large single holding in GOOG or US real estate such as a home in the Florida Keys.
vijaiananth wrote:
Tue May 22, 2018 9:52 am
By the way Ted, I read on another blog that the Irish domiciled ETFs (with underlying holdings of US companies) are registered in Ireland, and hence cannot be deemed an US situs property. As such, estate tax does not apply to Irish domiciled ETFs. This is a contradicting statement to one of your attachments on taxation (US estates and gift tax rules). What's your take on this?
You mean this statement:
U.S. SITUS PROPERTY: PROPERTY SUBJECT TO THE ESTATE TAX
...
3. U.S. Equities Shares of stock in U.S. companies, whether publicly traded or privately held (including shares of stock in a co-operative apartment corporation), and regardless of the location of the share certificates, are subject to the estate tax. Shares in a U.S. registered investment fund (“RIC”), including mutual funds, are U.S. situs property subject to the estate tax.
If so, no contradiction.

What this is saying is that if you hold a US domiciled ETF then you are holding 'shares of stock in a US company' -- in this case, the US domiciled ETF itself -- and so at risk from the US estate tax. What the ETF itself holds is completely immaterial as far as the US estate tax is concerned. Conversely, if you hold a non-US domciled ETF, for example one of Vanguard's Ireland domiciled offerings, what you actually hold is stock of a non-US company -- the Ireland domiciled ETF. If that ETF holds any 'shares of stock in a US company' within it then you in effect hold those US shares. But now that there is a non-US 'blocking' company between you and the actual US shares, so you are safe from US estate taxes.

The rule here in order to determine your US estate tax risk is to look at what you hold, and not at what you hold, holds. If you hold a US domiciled ETF you hold (by extension) a 'US share'. Even if that ETF holds absolutely no US stocks itself, you risk US estate tax by holding it. The converse is that if you hold an Ireland domiciled ETF you do not hold a 'US share', even if that ETF holds nothing but US stocks itself.

Make sense? (*) In other words, you can safely buy all you want of VUSD, Vanguard's Ireland domiciled S&P500 tracker ETF, and not risk any interaction with US estate taxes. If you instead used VOO, Vanguard's US domiciled S&P 500 tracker ETF, you would need to worry about US estate taxes once above $60k in total US holdings.

As icing on the cake, you would also pay less in effective US tax on dividends with VUSD than with VOO. Malaysia has no income tax treaty with the US, so US tax withholding on VOO for Malaysians would be 30%, leaving you 70% of the dividends. But VUSD can use the US/Ireland income tax treaty to reduce the US tax withholding on the US shares it holds to 15% (paid internally by the ETF), and you then receive the remaining 85% with no further tax loss to Ireland or anywhere else.

More on this in the following wiki pages, and which you might not yet have seen:
- Non-US investor's guide to navigating US tax traps
- Nonresident alien's ETF domicile decision table
- Nonresident alien taxation
- Nonresident alien with no US tax treaty & Irish ETFs

(*) By "make sense?" here, what I really mean is, Have I explained things clearly enough? This is US tax law, and estate tax law at that, so of course it is not going to "make sense" using the conventional meaning of the phrase!

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Wed May 23, 2018 12:30 am

TedSwippet wrote:
Tue May 22, 2018 11:30 am
Indeed. It is almost as if the US wishes to actively repel inward investment by foreigners, isn't it?
Absolutely, without a shadow of doubt.

TedSwippet wrote:
Tue May 22, 2018 11:30 am
Simplest is to use non-US domiciled funds or ETFs to stand between you and the actual US shares that you hold, and them either just make sure to never hold above $60k in cash in a US brokerage, or better still, use a non-US brokerage in the first place.

Another, although more expensive and more fiddly, is to use an intermediate 'holding company' set up by yourself and outside the US to hold these US shares. With the second, you have to be careful that the US cannot 'look through' the foreign company, but with care this is possible. This is the option to use if you want to hold something different from what non-US domiciled ETFs can offer, for example a large single holding in GOOG or US real estate such as a home in the Florida Keys.
Agreed. After vetting many brokerages, IB US is still the best bet, but that's only true pertaining to my context as Malaysian. On the other hand, "holding company" option is interesting, but in my current case, perhaps I don't need it, plus the extra cost that I may incur. Nevertheless, great information.

But I believe if one uses a US broker, irrespective of US domiciled ETF or Irish domiciled ETF, when the position is liquidated, it results in "cash holding", and if this "cash holding" is >$60k (eg: $100k), then $100k -$60k = $40k is liable to estate tax upon death of account holder. Correct me if I'm wrong.

So, in my opinion, since I'm keen to keep the investment well above $60k, I should just accept this estate tax risk. The only way I can see to manage this risk is to stay alive throughout my investment period:-). However, this will not be an issue for those who may opt to rebalance and always maintain the investment value at <$60k.
TedSwippet wrote:
Tue May 22, 2018 11:30 am
You mean this statement:
U.S. SITUS PROPERTY: PROPERTY SUBJECT TO THE ESTATE TAX
...
3. U.S. Equities Shares of stock in U.S. companies, whether publicly traded or privately held (including shares of stock in a co-operative apartment corporation), and regardless of the location of the share certificates, are subject to the estate tax. Shares in a U.S. registered investment fund (“RIC”), including mutual funds, are U.S. situs property subject to the estate tax.
If so, no contradiction.

What this is saying is that if you hold a US domiciled ETF then you are holding 'shares of stock in a US company' -- in this case, the US domiciled ETF itself -- and so at risk from the US estate tax. What the ETF itself holds is completely immaterial as far as the US estate tax is concerned. Conversely, if you hold a non-US domciled ETF, for example one of Vanguard's Ireland domiciled offerings, what you actually hold is stock of a non-US company -- the Ireland domiciled ETF. If that ETF holds any 'shares of stock in a US company' within it then you in effect hold those US shares. But now that there is a non-US 'blocking' company between you and the actual US shares, so you are safe from US estate taxes.

The rule here in order to determine your US estate tax risk is to look at what you hold, and not at what you hold, holds. If you hold a US domiciled ETF you hold (by extension) a 'US share'. Even if that ETF holds absolutely no US stocks itself, you risk US estate tax by holding it. The converse is that if you hold an Ireland domiciled ETF you do not hold a 'US share', even if that ETF holds nothing but US stocks itself.

Make sense? (*) In other words, you can safely buy all you want of VUSD, Vanguard's Ireland domiciled S&P500 tracker ETF, and not risk any interaction with US estate taxes. If you instead used VOO, Vanguard's US domiciled S&P 500 tracker ETF, you would need to worry about US estate taxes once above $60k in total US holdings.

As icing on the cake, you would also pay less in effective US tax on dividends with VUSD than with VOO. Malaysia has no income tax treaty with the US, so US tax withholding on VOO for Malaysians would be 30%, leaving you 70% of the dividends. But VUSD can use the US/Ireland income tax treaty to reduce the US tax withholding on the US shares it holds to 15% (paid internally by the ETF), and you then receive the remaining 85% with no further tax loss to Ireland or anywhere else.

More on this in the following wiki pages, and which you might not yet have seen:
- Non-US investor's guide to navigating US tax traps
- Nonresident alien's ETF domicile decision table
- Nonresident alien taxation
- Nonresident alien with no US tax treaty & Irish ETFs

(*) By "make sense?" here, what I really mean is, Have I explained things clearly enough? This is US tax law, and estate tax law at that, so of course it is not going to "make sense" using the conventional meaning of the phrase!
There's no better way to illustrate this, Ted. Very detailed explanation on the inner workings. Crystal clear. I'll have a look on the wiki pages too. Thanks a lot for putting up with my ever increasing questions.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Wed May 23, 2018 2:44 am

vijaiananth wrote:
Wed May 23, 2018 12:30 am
But I believe if one uses a US broker, irrespective of US domiciled ETF or Irish domiciled ETF, when the position is liquidated, it results in "cash holding", and if this "cash holding" is >$60k (eg: $100k), then $100k -$60k = $40k is liable to estate tax upon death of account holder. Correct me if I'm wrong.
That's right, but unless you are essentially mis-managing your investments, the risk of it actually applying seems to me to be acceptably low. It is only what you own on the date of your death that comes into play with the US estate tax. If your relatives, estate, or others sell your assets into cash in your broker after your death, this does not automatically suddenly become liable to US estate tax where it was not before.

For example, suppose you hold $1MM of VUSD (Vanguard S&P500, Ireland domiciled) and wish to rebalance $100k of that to VWRL (Vanguard all-world, Ireland domiciled) in Interactive Broker's US arm of operations. Normally you would put in a sell order for $100k of VUSD, and once that completes you would put in a purchase order for $100k of VWRL and wait for that to complete. Your only visible risk of US estate tax comes from holding $100k in 'cash' between these two. That might be on the order of an hour or two, maybe even less. At its longest, perhaps overnight given the time difference between Malaysia and the London Stock Exchange.

Of course, you could indeed actually die during this short period, but my sense is that the risk is tiny for nearly everyone. And if this really bothers you that much, you could rebalance in two separate $50k exchanges and stay below $60k the entire time. The same goes for investments and withdrawals. Buy as soon as you can after the money enters your Interactive Brokers account, and transfer out to another bank or broker immediately you make any sales where you want the cash to spend rather than to reinvest. Or transit in amounts below $60k.

Also, remember that you always have the option of using an entirely non-US broker (Saxo maybe, if you cannot persuade Interactive Brokers to let you use their UK offshoot?). Probably more expensive and less convenient, but with the certainty of complete insulation from rapacious US taxes.
vijaiananth wrote:
Wed May 23, 2018 12:30 am
So, in my opinion, since I'm keen to keep the investment well above $60k, I should just accept this estate tax risk. The only way I can see to manage this risk is to stay alive throughout my investment period:-).
Not really. As outlined above, provided you avoid directly holding any US domiciled stocks or ETFs then you only need to stay alive throughout a short rebalance period or other temporary cash transits, and even then only where these unavoidably exceed $60k. Otherwise, you are completely free to die as and when you please!

vijaiananth
Posts: 7
Joined: Tue Feb 06, 2018 10:25 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by vijaiananth » Fri May 25, 2018 1:45 am

TedSwippet wrote:
Wed May 23, 2018 2:44 am

That's right, but unless you are essentially mis-managing your investments, the risk of it actually applying seems to me to be acceptably low. It is only what you own on the date of your death that comes into play with the US estate tax. If your relatives, estate, or others sell your assets into cash in your broker after your death, this does not automatically suddenly become liable to US estate tax where it was not before.

For example, suppose you hold $1MM of VUSD (Vanguard S&P500, Ireland domiciled) and wish to rebalance $100k of that to VWRL (Vanguard all-world, Ireland domiciled) in Interactive Broker's US arm of operations. Normally you would put in a sell order for $100k of VUSD, and once that completes you would put in a purchase order for $100k of VWRL and wait for that to complete. Your only visible risk of US estate tax comes from holding $100k in 'cash' between these two. That might be on the order of an hour or two, maybe even less. At its longest, perhaps overnight given the time difference between Malaysia and the London Stock Exchange.

Of course, you could indeed actually die during this short period, but my sense is that the risk is tiny for nearly everyone. And if this really bothers you that much, you could rebalance in two separate $50k exchanges and stay below $60k the entire time. The same goes for investments and withdrawals. Buy as soon as you can after the money enters your Interactive Brokers account, and transfer out to another bank or broker immediately you make any sales where you want the cash to spend rather than to reinvest. Or transit in amounts below $60k.

Also, remember that you always have the option of using an entirely non-US broker (Saxo maybe, if you cannot persuade Interactive Brokers to let you use their UK offshoot?). Probably more expensive and less convenient, but with the certainty of complete insulation from rapacious US taxes.
Yes Ted. You've nailed it!. This is the very reason I'm seeking your advice, as evident from your postings all over the forum.
TedSwippet wrote:
Wed May 23, 2018 2:44 am
Not really. As outlined above, provided you avoid directly holding any US domiciled stocks or ETFs then you only need to stay alive throughout a short rebalance period or other temporary cash transits, and even then only where these unavoidably exceed $60k. Otherwise, you are completely free to die as and when you please!
Looks like my taxation-related nightmare is over :-)

Deats1980
Posts: 15
Joined: Thu May 03, 2018 8:57 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Deats1980 » Fri May 25, 2018 2:16 am

Thanks for these posts. They have been very informative. It also makes me feel more comfortable about using IB in the future (as a non-US investor). I believe one benefit of using IB is that they are insured up to $350,000 (or maybe it was $500,000?), which trumps companies such as Internaxx (100,000Euro). It's just an extra layer of protection that is worth having, imo.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Fri May 25, 2018 3:16 am

vijaiananth wrote:
Fri May 25, 2018 1:45 am
Looks like my taxation-related nightmare is over...
For completeness, I should probably add that getting a US broker to release assets to the estate of someone who has died can be a bit of a hassle. They may require a 'release certificate' from the IRS before they can remit funds to the estate, and the IRS will only do that after they receive and process a completed non-resident alien estate tax return, form 706-NA.

If you look at this form, you can see where your heirs have to list out assets in the US (schedule B, line 1) and outside (schedule B, line 2), as well as a lot of other intrusive information. Obviously your aim is to keep line 1 below $60k, but a lot of people object in principle to having to supply the IRS with all of this, particularly where there cannot possibly be any US estate tax due. There can also be considerable IRS delays in processing this form, perhaps on the order of a year.

In other words, even though you might escape an actual US estate tax financial liability, there are still potential costs and hassles involved in using a US broker. Having a professional complete the 706-NA may not be cheap, and a long wait twiddling thumbs while the IRS grinds though a (pointless) process will be similarly unwelcome.

Not to say that you should not proceed with your plan to use IB anyway, just noting that even without any US estate tax due, it will not necessarily all be plain sailing for your heirs should things come to that.

Wonderer
Posts: 2
Joined: Mon Oct 01, 2018 7:44 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Wonderer » Mon Oct 01, 2018 8:03 am

Hi guys,

Great advice! Saw the following at Vanguard Plc ETFs Prospectus (page 78):-

"If a Shareholder does not dispose of Shares within eight years of acquiring them, the Shareholder will
be deemed for Irish tax purposes to have disposed of the Shares on the eighth anniversary of their
acquisition (and any subsequent eighth anniversary). On such deemed disposal, the Company will
account for Irish tax on the increase in value (if any) of those Shares over that eight year period. The
Company will pay this tax to the Irish Revenue Commissioners. To fund the Irish tax liability, the
Company may appropriate or cancel Shares held by the Shareholder. This may result in further Irish
tax becoming due which the Company may satisfy by appropriating or cancelling additional Shares of
the Shareholder. No tax is payable by the Company in respect of Exempt Investors and Shareholders
who are not resident or ordinarily resident in Ireland and the required Declarations are in place.

However, if less than 10% of the Shares (by value) in the relevant Fund are held by non-Exempt
Investors (see below), the Company may elect not to account for Irish tax on this deemed disposal.

Where the value of the Shares held by non-Exempt Investors is less than 10% of the value of the total
Shares of the Company, the Company will not be obliged to deduct tax on the happening of such a
chargeable event, provided the Company elects to report certain information to the Irish Revenue
Commissioners and the Shareholder. In such circumstances, the Shareholder will have to account for
the appropriate tax arising on the happening of the chargeable event on a self-assessment basis.

Any Irish tax paid in respect of the increase in value of Shares over the eight year period may be set
off on a proportionate basis against any future Irish tax which would otherwise be payable in respect of
those Shares and any excess may be recovered on an ultimate disposal of the Shares. Where less
than 15% of the net asset value of Shares in the Company are held by taxable Irish persons, the
Company may elect not to repay Shareholders any overpaid tax. Such Shareholders must seek
repayment of any overpaid tax directly from the Irish Revenue Commissioners. In the event that such
an election is made, the Company will notify the Shareholder that the Company has made an election
and the Company will provide the Shareholders with the necessary information to enable the claim to
be made by the Shareholders to the Irish Revenue Commissioners."

Does this mean that as a investor of these ETFs (S&P 500, FTSE World etc), we are only to allow to buy-and-hold for a maximum period of 8 years? It does make any sense as these funds are meant for long term investing (I assume 8 years are not really considered long term). Any advice regarding this? Thanks !

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Wed Oct 03, 2018 4:55 pm

Welcome.
Wonderer wrote:
Mon Oct 01, 2018 8:03 am
Does this mean that as a investor of these ETFs (S&P 500, FTSE World etc), we are only to allow to buy-and-hold for a maximum period of 8 years?
No. Ireland has an odd system for its residents that taxes their accumulated capital gains every eight years even if they do not sell, and Ireland domiciled ETFs have to consider that when setting up their holding structures.

However, this weird system does not apply to non-Irish residents (presumably you are not resident in Ireland?). The part of the text you quoted that you need to focus on would be this:
No tax is payable ... in respect of ... Shareholders who are not resident or ordinarily resident in Ireland

Wonderer
Posts: 2
Joined: Mon Oct 01, 2018 7:44 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by Wonderer » Thu Oct 04, 2018 9:32 am

Hi TedSwippet,

Yup you are right that I am not a resident in Ireland. This taxation system is indeed "weird". Anyway, thanks for your clarification!

elderwise
Posts: 139
Joined: Fri Jul 22, 2016 10:27 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by elderwise » Thu Oct 04, 2018 1:23 pm

TedSwippet wrote:
Wed Oct 03, 2018 4:55 pm
Welcome.
Wonderer wrote:
Mon Oct 01, 2018 8:03 am
Does this mean that as a investor of these ETFs (S&P 500, FTSE World etc), we are only to allow to buy-and-hold for a maximum period of 8 years?
No. Ireland has an odd system for its residents that taxes their accumulated capital gains every eight years even if they do not sell, and Ireland domiciled ETFs have to consider that when setting up their holding structures.

However, this weird system does not apply to non-Irish residents (presumably you are not resident in Ireland?). The part of the text you quoted that you need to focus on would be this:
No tax is payable ... in respect of ... Shareholders who are not resident or ordinarily resident in Ireland
Hi Ted, et al anyone else who can help with this query.

My Friend (non US Citizen / Non US Resident - Indian national) residing in Dubai, has around 100K to invest, wants to invest in irish domiciled US Vanguard ETF's.IB is us based so 60K estate hit would apply, what other brokers will allow you to trade in irish ETF's as non us , non us resident?

India does not tax foreign income for non residents.
Dubai has no tax of any kind

So since Ireland does not tax even ETF's on non resident status, does this mean all proceeds from Vanguard Irish Domiciled ETF's holding US equities are not taxed at all? maybe i got this wrong...

Thanks,

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Thu Oct 04, 2018 4:57 pm

elderwise wrote:
Thu Oct 04, 2018 1:23 pm
My Friend (non US Citizen / Non US Resident - Indian national) residing in Dubai, has around 100K to invest, wants to invest in irish domiciled US Vanguard ETF's.IB is us based so 60K estate hit would apply, what other brokers will allow you to trade in irish ETF's as non us , non us resident?
As long as your friend does not keep more than $60k in cash in IB, and only ever buys non-US situated assets -- Ireland domiciled ETFs, for example -- they should be well insulated from rapacious US estate taxes. The only risky period might be the time between sending $100k to the broker and actually buying the Ireland domiciled ETFs. That's readily sidestepped in this case by doing things in two $50k chunks.

As for other brokers, Saxo is the only fully non-US one I'm (vaguely) aware of for people with an international lifestyle, and only because I have seen other posters mention them here. There are probably others if you search around the forum, but I can't give you any idea of how good any of them would be.
elderwise wrote:
Thu Oct 04, 2018 1:23 pm
So since Ireland does not tax even ETF's on non resident status, does this mean all proceeds from Vanguard Irish Domiciled ETF's holding US equities are not taxed at all? maybe i got this wrong...
Not quite that. Where an Ireland domiciled ETF holds US equities, the US will take 15% in tax on dividends paid by those equities to the ETF -- 15% is the US/Ireland treaty dividend rate. That's a decent improvement over the 30% a US non-resident alien living in Dubai would normally have to pay the US in dividend tax on a US situated holding, so well worth capturing. Of course, this is in addition to avoiding the risk of any heinous US estate taxes. And nothing else is taken by Ireland. Ireland domiciled ETFs are fully 'tax-transparent'.

Better still, where the ETF holds non-US stocks, if your friend were to hold a US domiciled version of this they would also pay 30% to the US in dividend tax, even though they actually hold no underlying US stocks at all. In contrast, an Ireland domiciled version of an ETF tracking the same market(s) suffers no US or Irish tax interference.

Residents of Dubai are highly motivated to use Ireland domiciled ETFs and avoid US domiciled ones entirely. The UAE has no tax treaties of any kind with the US. (It does have one with Ireland, but you don't need to know the details of it since Irish tax law for all non-residents of Ireland is entirely non-intrusive, whereas US tax law for many non-residents of the US is brutal.)

elderwise
Posts: 139
Joined: Fri Jul 22, 2016 10:27 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by elderwise » Fri Oct 05, 2018 9:17 am

TedSwippet wrote:
Thu Oct 04, 2018 4:57 pm
elderwise wrote:
Thu Oct 04, 2018 1:23 pm
My Friend (non US Citizen / Non US Resident - Indian national) residing in Dubai, has around 100K to invest, wants to invest in irish domiciled US Vanguard ETF's.IB is us based so 60K estate hit would apply, what other brokers will allow you to trade in irish ETF's as non us , non us resident?
As long as your friend does not keep more than $60k in cash in IB, and only ever buys non-US situated assets -- Ireland domiciled ETFs, for example -- they should be well insulated from rapacious US estate taxes. The only risky period might be the time between sending $100k to the broker and actually buying the Ireland domiciled ETFs. That's readily sidestepped in this case by doing things in two $50k chunks.

As for other brokers, Saxo is the only fully non-US one I'm (vaguely) aware of for people with an international lifestyle, and only because I have seen other posters mention them here. There are probably others if you search around the forum, but I can't give you any idea of how good any of them would be.
elderwise wrote:
Thu Oct 04, 2018 1:23 pm
So since Ireland does not tax even ETF's on non resident status, does this mean all proceeds from Vanguard Irish Domiciled ETF's holding US equities are not taxed at all? maybe i got this wrong...
Not quite that. Where an Ireland domiciled ETF holds US equities, the US will take 15% in tax on dividends paid by those equities to the ETF -- 15% is the US/Ireland treaty dividend rate. That's a decent improvement over the 30% a US non-resident alien living in Dubai would normally have to pay the US in dividend tax on a US situated holding, so well worth capturing. Of course, this is in addition to avoiding the risk of any heinous US estate taxes. And nothing else is taken by Ireland. Ireland domiciled ETFs are fully 'tax-transparent'.

Better still, where the ETF holds non-US stocks, if your friend were to hold a US domiciled version of this they would also pay 30% to the US in dividend tax, even though they actually hold no underlying US stocks at all. In contrast, an Ireland domiciled version of an ETF tracking the same market(s) suffers no US or Irish tax interference.

Residents of Dubai are highly motivated to use Ireland domiciled ETFs and avoid US domiciled ones entirely. The UAE has no tax treaties of any kind with the US. (It does have one with Ireland, but you don't need to know the details of it since Irish tax law for all non-residents of Ireland is entirely non-intrusive, whereas US tax law for many non-residents of the US is brutal.)
Thank you so much for clarifying, definitely I understand it better.So what you *are* saying is this 60K issue only and only arises IF the balance / holding is in CASH as long as they are held in ETF;s / MFs etc it should not apply?Conversely, I assume it would also be a valid concern during liquidation? that if he had 150K, he would need to liquidate in lots of 50 or 55K each and then transfer the money out , rinse / repeat?I actually misunderstood that as long as the $ value of cash + holdings (etf / mf etc) exceeds 60K you are liable for the estate taxes if you die.

Do you know if the Vanguard Irish ETF's are better or the Blackrock Irish ETF iShares ? I read somewhere(now cant find) that one of those reinvests dividends automatically, so no need of any manual intervention.That would be the preferred route - no need to hand hold / reinvest manually.

Thanks a lot!

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Fri Oct 05, 2018 9:59 am

elderwise wrote:
Fri Oct 05, 2018 9:17 am
So what you *are* saying is this 60K issue only and only arises IF the balance / holding is in CASH as long as they are held in ETF;s / MFs etc it should not apply?
As long as the balance is held in non-US domiciled ETFs, MFs etc then no threat from US estate tax, since these are 'non-US situs' assets. However, a cash holding in a US broker is a 'US situs' asset, and so is threatened by the US estate tax. (A cash holding(*) in a US bank is not a 'US situs' asset, though -- and before you point it out... yes, this makes absolutely no sense at all.)

{ (*) Specifically that would be a cash balance. Actual paper folding currency held physically in a US bank safety deposit box can be 'US situs' and so threatened by the US estate tax. This is even more nonsensical than the case described above, then. }
elderwise wrote:
Fri Oct 05, 2018 9:17 am
Conversely, I assume it would also be a valid concern during liquidation? that if he had 150K, he would need to liquidate in lots of 50 or 55K each and then transfer the money out , rinse / repeat?
Potentially yes, a worry. Also if you rebalance more than $60k. In practice, provided that on purchase you transfer cash in to the broker right before you buy, and on liquidation you transfer the cash proceeds out of the broker as fast as possible, the risk will be minimal. Perhaps on the order of a day or so, during which you simply have to make sure not to die(!).

If that's unacceptable then using a purely non-US broker or holding these assets through an intermediate 'blocker' corporation are the only real defences.

It is completely ridiculous, not to mention self-defeating, for the US to apply these rules as they do. But just because something is silly or even self-harming, doesn't mean that congress won't do it. The situation has been this way for decades now, and it is highly unlikely to improve any time soon.
elderwise wrote:
Fri Oct 05, 2018 9:17 am
I actually misunderstood that as long as the $ value of cash + holdings (etf / mf etc) exceeds 60K you are liable for the estate taxes if you die.
Again, only where the 'US situs' part of your holdings exceeds $60k. That would be any US domiciled ETFs or funds, US stocks, and broker cash, but not Ireland domiciled ETFs or other non-US stock or bond holdings.
elderwise wrote:
Fri Oct 05, 2018 9:17 am
Do you know if the Vanguard Irish ETF's are better or the Blackrock Irish ETF iShares ? I read somewhere(now cant find) that one of those reinvests dividends automatically, so no need of any manual intervention.That would be the preferred route - no need to hand hold / reinvest manually.
iShare's SWDA is 'accumulating', so can be useful where the cost of reinvesting dividends is high, or where a country applies a lower capital gains tax rate to 'accumulated' dividends. In the case of the UAE, no local tax, so here the only gain would be the convenience and potentially lower trading costs of an 'accumulating' ETF. It also has a slightly lower TER than Vanguard's VWRD, so a bit of a bonus there also.

Because of restrictive and protectionist US tax laws, accumulation ETFs are effectively off-limits to US investors, so you will not find them widely discussed here.

elderwise
Posts: 139
Joined: Fri Jul 22, 2016 10:27 am

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by elderwise » Fri Oct 05, 2018 10:52 am

TedSwippet wrote:
Fri Oct 05, 2018 9:59 am
elderwise wrote:
Fri Oct 05, 2018 9:17 am
So what you *are* saying is this 60K issue only and only arises IF the balance / holding is in CASH as long as they are held in ETF;s / MFs etc it should not apply?
As long as the balance is held in non-US domiciled ETFs, MFs etc then no threat from US estate tax, since these are 'non-US situs' assets. However, a cash holding in a US broker is a 'US situs' asset, and so is threatened by the US estate tax. (A cash holding(*) in a US bank is not a 'US situs' asset, though -- and before you point it out... yes, this makes absolutely no sense at all.)

{ (*) Specifically that would be a cash balance. Actual paper folding currency held physically in a US bank safety deposit box can be 'US situs' and so threatened by the US estate tax. This is even more nonsensical than the case described above, then. }
elderwise wrote:
Fri Oct 05, 2018 9:17 am
Conversely, I assume it would also be a valid concern during liquidation? that if he had 150K, he would need to liquidate in lots of 50 or 55K each and then transfer the money out , rinse / repeat?
Potentially yes, a worry. Also if you rebalance more than $60k. In practice, provided that on purchase you transfer cash in to the broker right before you buy, and on liquidation you transfer the cash proceeds out of the broker as fast as possible, the risk will be minimal. Perhaps on the order of a day or so, during which you simply have to make sure not to die(!).

If that's unacceptable then using a purely non-US broker or holding these assets through an intermediate 'blocker' corporation are the only real defences.

It is completely ridiculous, not to mention self-defeating, for the US to apply these rules as they do. But just because something is silly or even self-harming, doesn't mean that congress won't do it. The situation has been this way for decades now, and it is highly unlikely to improve any time soon.
elderwise wrote:
Fri Oct 05, 2018 9:17 am
I actually misunderstood that as long as the $ value of cash + holdings (etf / mf etc) exceeds 60K you are liable for the estate taxes if you die.
Again, only where the 'US situs' part of your holdings exceeds $60k. That would be any US domiciled ETFs or funds, US stocks, and broker cash, but not Ireland domiciled ETFs or other non-US stock or bond holdings.
elderwise wrote:
Fri Oct 05, 2018 9:17 am
Do you know if the Vanguard Irish ETF's are better or the Blackrock Irish ETF iShares ? I read somewhere(now cant find) that one of those reinvests dividends automatically, so no need of any manual intervention.That would be the preferred route - no need to hand hold / reinvest manually.
iShare's SWDA is 'accumulating', so can be useful where the cost of reinvesting dividends is high, or where a country applies a lower capital gains tax rate to 'accumulated' dividends. In the case of the UAE, no local tax, so here the only gain would be the convenience and potentially lower trading costs of an 'accumulating' ETF. It also has a slightly lower TER than Vanguard's VWRD, so a bit of a bonus there also.

Because of restrictive and protectionist US tax laws, accumulation ETFs are effectively off-limits to US investors, so you will not find them widely discussed here.
Being a US Citizen reading about PFIC , and all these stupid requirements sometimes make me feel I should get Canadian , Australian or British Citizenship, I re-read your first paragraph for the tenth time and still have doubts about

"(A cash holding(*) in a US bank is not a 'US situs' asset, though -- and before you point it out... yes, this makes absolutely no sense at all.)"

so if an NRA / non US person opens a US bnk account, opens a checking account with $50, (not a deposit box with $50 in 10 dollar bills - you are saying the account with 50 balance is not considered US Situs????!

lastly, for my friend who is an Indian citizen in Dubai, India does not tax foreign income on NRI non resident indians abroad / dubai also has NO tax of any kind - would it be preferred to hold accumulating ETF's vs dividend distributing ones (both Irish domiciled). Do accumulating ETF's (say when you open an IB account - report the GAIN in $ over the last FY for the holding ? if in case I wanted to know how much $ investment gain was made?

Like my work 401K, holding of VTSAX does show investment gain even though VTSAX is a dividend distributing not accumulating.

Thanks , Ted.

TedSwippet
Posts: 2146
Joined: Mon Jun 04, 2007 4:19 pm

Re: Tax implications of investing through London Stock Exchange for non-resident investors

Post by TedSwippet » Fri Oct 05, 2018 11:10 am

elderwise wrote:
Fri Oct 05, 2018 10:52 am
So if an NRA / non US person opens a US bnk account, opens a checking account with $50, (not a deposit box with $50 in 10 dollar bills - you are saying the account with 50 balance is not considered US Situs????!
Yes, precisely. From a brief summary produced by a NY law firm:
The U.S. estate and gift tax rules are technical and not obvious. Only assets that are deemed to be “U.S. situs property” are subject to the estate tax. However, certain U.S. situs property that is subject to the estate tax is not subject to the gift tax.
...
Tangible Personal Property Art, jewelry, gold coins, cash in a safe deposit box, furniture, and other tangible property located in the U.S. are subject to the estate tax.
...
Non Bank Deposits Cash accounts with U.S. brokerage firms are not considered bank deposits and are subject to the estate tax.
...
Bank Accounts Generally, cash on deposit with a U.S. bank or insurance company (not with a brokerage firm) is not subject to the estate tax.
...
Clearly these are actual US estate tax rules. Nobody could make up anything this nonsensical.
elderwise wrote:
Fri Oct 05, 2018 10:52 am
... would it be preferred to hold accumulating ETF's vs dividend distributing ones (both Irish domiciled). Do accumulating ETF's (say when you open an IB account - report the GAIN in $ over the last FY for the holding ? if in case I wanted to know how much $ investment gain was made? Like my work 401K, holding of VTSAX does show investment gain even though VTSAX is a dividend distributing not accumulating.
Since the UAE is a tax-free jurisdiction, the benefits from holding accumulating versus distributing ETFs will be more or less exactly the same as anything you get from automatically reinvesting dividends (or not) in your own 401k or IRA accounts. Nothing more or less than that, really.

I don't know how IB tracks gains, but if it doesn't -- or if it does but not the way you might like -- it should be pretty easy to come up with a spreadsheet that does the job you want. This is probably pretty minor in the grand scheme of things.

Post Reply