September 17, 2010 6:06 pm

Investors could reclaim millions in overseas tax

Thousands of private investors in overseas shares and exchange traded funds (ETFs) based abroad could be paying more tax than necessary on dividends by failing to file foreign ownership paperwork or not claiming back excess deductions.

So-called withholding tax deductions of as much as 30 per cent in the US – the most popular overseas market for UK shareholders – and 35 per cent in Switzerland mean that UK taxpayers can, in effect, end up “paying tax twice”.

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Typically, only about 15 percentage points of these overseas deductions can be credited against UK tax liabilities.

According to Goal Group, which specialises in withholding tax reclamation, UK retail investors are collectively missing out on many millions of pounds of reclaimable overseas tax, largely because of “red tape” and the cost of claiming in some countries.

“Those with significant shareholdings know how to reclaim or will be advised, but small investors will be hit,” it says.

John Whiting, policy director at the Chartered Institute of Taxation, says: “Many investors will not even be aware of withholding tax as an issue (with overseas shares).”

When buying US shares, a “good broker” should ensure investors correctly complete a W-8BEN “certificate of foreign status” form, according to Roger Lawson, former director of the UK Shareholders Association (UKSA). This form ensures that only 15 per cent tax – rather than 30 per cent – is deducted at source from dividends. That remaining 15 per cent can then be offset against UK tax bills.

But while brokers including TD Waterhouse and Charles Schwab insist a W-8BEN is completed before clients can trade, Halifax Sharedealing and Interactive Investor leave this paperwork for the investor to sort out.

Halifax, which regularly runs commission-free dealing offers for overseas shares, says that because the US forms need to be refiled every three years, it decided to leave the responsibility with investors after encountering difficulties getting clients to send back updated paperwork.

Even where investors do complete a form, minor errors – including abbreviating country of residence to “UK”, rather than spelling out “United Kingdom” – can lead to the preferential 15 per cent rate not being given, warns James Daly of TD Waterhouse. The broker has to send back “so many” forms to investors for correction, he adds, because of the “extremely strict” US requirements.

Goal adds that many brokers “don’t have the right people” to ensure that the tax paperwork is in order, resulting in “significant” numbers of investors overpaying. As well as having 30 per cent tax deducted from dividends, in some cases 28 per cent can also be withheld from the proceeds of US share sales, it warns.

Tax overpayments can be reclaimed for the previous two years in the US, but this can be a lengthy procedure. With other countries, such as Switzerland, investors only have the option of reclaiming – no “relief at source” is on offer to reduce the 35 per cent deduction.

Goal points out that the Swiss reclamation procedure involves an English-language form and “is nowhere near as complicated as in the US”.

However, to reclaim tax in Italy, Spain or France, investors need to go through an agent – an extra cost that may make the exercise not worthwhile. French withholding tax on dividends is generally 25 per cent, while investors in the widely-held Spanish bank Santander can in theory reclaim four percentage points of Spain’s 19 per cent deduction.

Goal offers a fixed-fee service charging up to about £100 for reclaims and said this week it planned to put a free e-reclaim service on its website (GoalGroup.com) allowing investors to download the necessary claim forms.

Separately, Santander investors can avoid all of the 19 per cent withholding tax on their next quarterly dividend, due in November, by taking the payout in stock rather than cash form.

Details of this “scrip dividend” option were sent out last month to shareholders in the bank’s nominee service.

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