How to invest in US stocks from the UK

You can use your AJ Bell ISA, pension and Dealing account to buy US shares directly, or funds that invest in US companies and government debt.

ISAs and pensions shelter your investments from UK income and capital gains tax. But if you want to buy overseas stocks and shares, there can be non-UK taxes to consider. If you’re thinking of investing in companies based in the United States through your AJ Bell accounts, here’s what you need to know about US withholding tax.

Tax on US shares

Non-US residents and citizens must pay tax on income received from US shares. This is known as withholding tax. US withholding tax is collected at source which means it is deducted directly from the dividend payment.

Thanks to a tax treaty between the UK and the US, the rate of US withholding tax on qualifying dividends and interest can be halved for UK-based investors, and in some cases reduced to 0%.

What is the rate of US withholding tax?

The main rate of US withholding tax is 30%, and this could apply to income you receive from US investments, even in a tax wrapper (like an ISA), where investments are exempt from UK taxes.

The US-UK tax treaty lets you complete an official form to lower the rate of US withholding tax. It’s known as a W-8BEN form and once completed, it’s usually valid for up to three years.

As well as allowing you to deal in individual US shares, this form lets you benefit from the US-UK treaty rates, which lowers the withholding tax for qualifying US dividends and interest from 30% to 15% for ISA and Dealing accounts.

An individual W-8BEN form is not required for US investments held in an AJ Bell Self-invested personal pension (SIPP), as the IRS recognises our SIPP as a qualifying pension scheme. This means all qualifying dividends and interest on individual US shares you hold are automatically paid to you free of any withholding tax.

Trustees of other pension schemes can also benefit from reduced rates of withholding tax when they invest through AJ Bell, using the W-8BEN entity form.

How do I complete a W-8BEN form for my AJ Bell account?

If you’re looking to buy US investments in one of our ISAs or Dealing accounts, you can usually complete a W-8BEN form online. Just log into your AJ Bell account and click 'Update my details' from the 'My account' menu to find it.

If you manage a junior account or have a joint Dealing account, you'll need to complete our offline W-8BEN form. We’ve got W-8BEN guidelines to help you complete it correctly.

A form is not required to buy and sell US investments in your AJ Bell SIPP, or to benefit from the 0% withholding tax rate for qualifying pension schemes.

Funds that invest in US shares

A fund that invests in US shares is not usually domiciled in the US. As well as UK domiciled funds that might invest in the US, many exchange-traded funds (ETFs) that can be held in UK ISAs and pensions are domiciled in Ireland or Luxembourg.

As a fund is treated as its own legal entity, withholding tax would be incurred at 15% for UK and Irish domiciled funds and 30% for those based in Luxembourg. Unlike individual shares, the fact the end investor holds the fund units in a UK pension would not be relevant to the US tax authorities.

Synthetic ETFs are shielded from withholding tax on their US share holdings. Unlike physical ETFs, they don’t own the underlying assets but have agreements with a third party (such as an investment bank) to deliver the index’s return minus fees. Synthetic ETFs may incur an extra fee from trades they make, but in many cases, this is smaller than what the international tax would be. This might result in a lower tracking error, but synthetic replication has historically been viewed as higher risk due to less transparency and higher counterparty risk.

Today, many synthetic ETFs manage and mitigate some of this, but it’s still important to check the details of what you’re investing in that you understand how returns might be generated.