Tax on US REITs held by UK residents

[schober]

On this thread
viewtopic.php?f=31&t=13132
there was some talk of US REITs, focussing on high yielders like LXP - Lexington Realty Trust. Now, have I got this right about the taxation? (for a UK resident individual investor)

The sept divi details from http://ir.lxp.com/file/Index?KeyFile=391845121

Record Date 09/29/2017
Total Distributions $0.175
Total Ordinary Dividends $0.105130
Qualified Dividends Distributions $0.000260
Nondividend Distributions $0.069870

Only the Ordinary Divi portion $0,10513 of the Total $0.175 will be subject to withholding tax at 15%. The rest of the divi is not taxed.
https://www.reit.com/sites/default/file ... ldingTax(1).pdf
ie $0.01577 would be withheld (0.15 x 0.010513) in sept & this is the only tax due to the IRS.
Iwould hold them in an isa to avoid UK CGT & divi tax

[PinkDalek]

On this thread
viewtopic.php?f=31&t=13132
there was some talk of US REITs, ...
I would hold them in an isa to avoid UK CGT & divi tax

I appreciate it is not your question but if held in a SIPP or approved personal pension (subject to provider), it should be possible for the distributions to be received without any withholding tax (as well as not being subjected to CGT and Income Tax).

Your summary of what the September 2017 withholding tax situation would have been doesn’t look incorrect. Are you sure the WHT is an issue for you - see the first part of my post back there for a brief summary viewtopic.php?p=158968#p158968.

Unfortunately the software TLF uses breaks your second link but this should provide access https://bit.ly/2ONfzsv but I’m not sure it adds much of interest.

[Lootman]

Total Distributions $0.175
Total Ordinary Dividends $0.105130
Qualified Dividends Distributions $0.000260
Nondividend Distributions $0.069870

FYI, the adjective "qualified" there means that it qualifies under the US tax code to be taxed at the lower income tax rate for dividends there, which is 15% rather than your marginal rate of income tax. I do not believe it has any significance for UK taxation.

What would worry me more is those "non-dividend distributions". US funds have to distribution capital gains every year, unlike in the UK. That might not matter if you hold it in an ISA or SIPP, of course, but is really annoying if you hold it in a taxable account.

I'd want to be quite certain that there won't be a withholding tax for capital gains. I don't believe that foreigners have to pay US CGT on US securities, although they do on gains of direct holdings of US property.

I'd also want to know, if holding in an ISA or SIPP, that it is an allowable security. I had a problem in the past with a US vehicle held within an ISA, and had to sell it because the plan manager decided that it was not eligible for an ISA. It shared some of the features of this REIT, i.e. it had complex distributions that comprised dividends, gains and a return of capital.

Other complicated US securities, like limited partnerships, issue K-1 statements annually which break down the distributions into many categories. I do not see any sign that this one does but, in my experience, they should be avoided like the plague.

[PinkDalek]

...
I'd want to be quite certain that there won't be a withholding tax for capital gains. I don't believe that foreigners have to pay US CGT on US securities, ...

Isn’t that partially what the W-8BEN covers. Without a valid one in force, aren’t all remittances deriving from dividends or sale proceeds (rather than gain) etc subjected to a 30% withholding?

With one in force, “only” 15% on dividends.

[TedSwippet]

Isn’t that partially what the W-8BEN covers. Without a valid one in force, aren’t all remittances deriving from dividends or sale proceeds (rather than gain) etc subjected to a 30% withholding? ... With one in force, “only” 15% on dividends.

At the risk of pedantry here... The US has two parallel non-resident withholding regimes with a possible 30% rate.

The first is for tax, IRC chapter 3. It applies to dividends paid to foreigners, but not to interest or capital gains, both of which are US tax and withholding free to all non-resident aliens whether or not there is a treaty. Absent a treaty the US rate on dividends is 30%. The UK treaty reduces this to 15%, claimable with a W-8BEN.

If a fund returns both interest and dividends as part of its distributions, fund managers might split that out in a way that the right rates apply. For example, I hold a tiny amount in a Vanguard US money market account, and it spits out both interest and dividend income. With a W-8BEN in place I see a blended US rate on my distributions from it that is inconsistent across months but always below 15%. I am sure it's a boatload of work for the fund provider, especially as my total distributions here amount to less than $2/month, but it's what they do anyway. (It's also a boatload of work for my UK tax return, producing a difference that sometimes, but not always, disappears entirely when rounded up/down into GBP -- sigh.)

The second is FATCA, IRC chapter 4. This is 30% of everything -- dividends, interest, and even gross sale proceeds (yes, really!) -- but it does not apply where the other country has a FATCA 'intergovernmental agreement' in place. The UK does, so the W-8BEN protects here also.