Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How much does it cost to buy overseas shares?
As the world has become more international more investors want to buy shares listed on overseas stock markets, particularly in the US.
The likes of Amazon, Google, Apple and Facebook are all listed in the US, as are emerging innovative companies such as Uber, Tesla and Spotify.
However, while it’s much easier to buy overseas-listed shares today than it was even 10 years ago, UK investors wanting to access them may find they face much higher charges than buying London-listed stocks. You’ll need to navigate currency charges as well as dealing costs.
WHAT TO CONSIDER
You first need to consider the currency exchange. Your UK investment account will be held in pounds but in order to buy US shares, in this example, you’d need to convert the money into dollars. Then each time you sell those shares you’d need to convert your money back into pounds.
There’s a cost each time you do this. This cost will vary on each investment platform, so if you plan to buy lots of overseas shares you should factor this in when you select your ISA, SIPP (self-invested personal pension) or dealing account provider.
Some platforms reduce the fee based on investing more, such as paying 1% on the first £10,000 invested but only 0.75% on the next £10,000.
For example, if you were going to invest £10,000 in American-listed stock Apple and the foreign exchange fee was 1%, you’d pay £100 just to convert that money from pounds to dollars. On top of that you’d pay your usual dealing charge, which also varies by platform. If we assume it’s £10 then in total you’d incur £110 worth of charges to buy the shares.
You’ll also pay this money to sell. You need to effectively double this charge – although you’d hope the investment would have risen in value which means your foreign exchange fee will also rise as it’s a percentage cost in our example.
For ease, if we assume the investment remains flat that means you’d be paying £220 just to buy and sell the stock. On a £10,000 investment that represents 2.2% of the initial investment, meaning your Apple stock needs to rise by 2.2% before you’ve broken even on the dealing and foreign exchange fees.
Some providers charge more than this amount and will charge 1.5% on the foreign exchange. For the above example that would bump your costs of buying up to £150, plus the dealing cost.
If we still assume £10 dealing charges that would mean a £320 cost of just buying and selling the stock – meaning your investment in the Apple example would need to rise by 3.2% for you to break even on those costs.
And remember, this is before your general investment account costs, such as your platform or ‘custody’ charge.
In addition, if you get any dividends paid by the stock during the time you own it, this money would need to be immediately converted back into pounds in order for it to be added to your ISA, SIPP or dealing account. Some platforms offer a reduced foreign exchange fee for this, while others charge the full whack. But it’s a cost you still need to bear in mind.
When you’re buying these overseas stocks, you’re also at the mercy of the exchange rate the platform will provide you.
When we all exchange cash to go on our summer holidays, we will often shop around to go to the foreign exchange provider offering the best rate. However, there isn’t this option with investment platforms as you can’t exchange your money elsewhere and then transfer it into your investment account.
For example, you wouldn’t be able to use an alternative online currency exchange service to convert your pounds into dollars and then move those dollars into your investment account. This means that you might get a worse exchange rate than expected and you should look at how your investment account provider calculates this figure.
Some platforms will allow you to hold certain currencies in your SIPP or dealing account, converted from sterling once you’ve deposited the cash into your account. This means that if you know you’re going to be buying a lot of overseas stocks you could convert more money at one time and benefit from the tiered foreign exchange charges.
You could also capitalise on a dip in currency rates in your favour, and keep the money in your account until you want to use it – meaning that ultimately the stock will cost you less if exchange rates have moved in your favour during that time (although the rates could also move against you).
However, this isn’t an option for ISA accounts as HMRC doesn’t allow anything other than sterling to be held in them – so it’s only useful if you’re investing outside an ISA.
Another cost that you need to consider if you’re investing in overseas shares in either an ISA or a dealing account is the tax implications.
If we continue the US example from above, anyone buying those shares will need to fill out a US tax form, called a W-8BEN form, which entitles you to a reduced tax rate.
However, you’ll still pay 15% tax on any dividends paid out (instead of the usual 30%), which is another cost you need to factor in.
If you’re buying through a SIPP then you don’t need to fill out the form and you will automatically get the dividend tax free. There are similar taxes due in other countries, so make sure you check that out before you invest.