Every UK investor will probably know what an ISA is, but for those that don’t it is simply a tax free wrapper in which to hold your investments which frees you from Capital Gains Tax and Income Tax on dividends. But what’s the best ISA?
There are plenty of exhaustive lists around of ISAs for UK investors, however I have found many of these inadequate for a UK value investor. They tend to focus on funds and the associated costs. That’s great for normal investors and I even hold some funds myself, but for a value investor it isn’t really a major concern. So I thought I would write this post, not as a general guide to choosing an ISA, there are already plenty of them about, more as a supplementary guide, to look at the area that most guides don’t cover. That is the best ISA for foreign shares.
Many ISAs are restricted to UK shares, only a few seem to deal with US shares and even fewer with other exchanges. For a value investor I think it’s important to have the option of as wide a range of markets as possible and be able to buy foreign shares.
In regard to this, there are plenty of hidden costs with international shares, many brokers levy an FX charge, a commission on changing currency. Some are as high as 2%, which adds up to 4% on each investment once sold. That’s a large fee as it doesn’t even include transaction costs, bid/ask spreads or foreign withholding tax.
Which leads me onto another issue, especially with US holdings which I quite like due to the detailed regulatory filings. The US withholds a 30% tax on dividends for UK investors. This pretty much means investing in high dividend US paying stocks isn’t worth it for UK residents. However by completing a form called a W8-BEN, you can reduce this to a 15% tax which is far more acceptable. The problem is that few brokers actually accept this form.
There are other charges which can be hidden from investors, things to look out for with ISAs are:
Administration fees
Inactivity fees
Commissions (and minimum commissions)
FX charges
Account closure fees and transfer out fees
Cash withdrawal/deposit fees
Best ISA for foreign shares
After searching the marketplace for what seems like years without success I think I have finally found a bank which offers the best ISA for a value investor looking to have easy and cheap access to international markets. They charge no inactivity fees and have low FX charges of 0.5%. Commission is reasonable and I have also been informed that they will soon start accepting W8-BEN forms, although they currently don’t.
The bank is called SAXO Bank. I don’t recommend them for everyone, their UK commission is very competitive for smaller investors, but not the best. Also their fund charges are far higher than competitors. But for me, they have a wide range of markets, reasonable FX charges and low international commissions. They’re the best ISA I’ve found for foreign shares I will be moving my ISA to them in the new tax year.
Disclosure: No position in SAXO
Investing Sidekick
Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.