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Choosing a broker for investing in the US

Investment discussion for beginners. Why you should invest your money, get help getting started
zayuk
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Choosing a broker for investing in the US

#114971

Postby zayuk » February 1st, 2018, 4:12 pm

Hi everyone

I've been trying to find the best platform for investing in US stocks and bonds. I am aiming for a passive portfolio which will probably constitute of either ETFs in stocks and bonds or I will go for an individual government bond/stock split with enough diversification. Either way I will probably be making only a couple of trades a year.

My situation is a bit difficult because I am citizen of an European country but I am not yet a UK resident. I could, however, become one since I will be taking a job in London starting from this summer.

My options:
I recently found out about the ISA brokerage accounts and the tax benefits and could potentially qualify for one of those.In addition it could be easier to deal with taxation. However, I have also been looking at TD Ameritrade and they seem to offer lower fees than the UK brokerages with access to the US market. If I register a TD Ameritrade account, I wouldn't get the tax benefits from the ISA but I would be able to take advantage of their fee structure and access to the US market.

What would you do if you were in my position and what would the taxation hassle in either option be?

TedSwippet
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Re: Choosing a broker for investing in the US

#115006

Postby TedSwippet » February 1st, 2018, 5:37 pm

zayuk wrote:What would you do if you were in my position and what would the taxation hassle in either option be?

TD Ameritrade are a US broker, so won't offer an ISA. Vanguard, iShares, and others all issue Ireland domiciled ETFs that trade on the LSE but track US stocks and bonds. Will TD Ameritrade let you buy Ireland domiciled ETFs on the LSE rather than, say, US domiciled ETFs listed on the NYSE? If no, then best avoided.

Why? Well, if you hold 'non-reporting status' funds or ETFs in the UK and outside of an ISA, the tax on these is worse than if you hold ones with 'reporting' status. A few Vanguard US domiciled ETFs have UK reporting status, but many other US domiciled ones won't. In contrast, the more normal (for UK investors) ETFs found on the LSE all have UK reporting status. In a nutshell then, if you are a UK resident and hold 'offshore' funds or ETFs outside of an ISA or pension you suffer unfavourable UK tax rates.

On the other hand, an ISA would let you buy more or less anything you like -- Ireland domiciled ETFs, US domiciled ones, whatever -- and insulate you from UK tax issues. You might not be able to keep things that way if/when you leave the UK, perhaps having to sell, but up to that point it's all clean and easy. And if you decide to stay in the UK longer term, you will be glad that you used a UK tax shelter when you could.

If you will indeed only trade two or three times a year then trading costs are a non-issue. If this were me, and answering your question exactly as asked, I would open an ISA in an iWeb account (£25 one-off fee, a facet of Halifax Sharedealing) and then buy (say) tranches of VUSA or VNRT for equities and VUTY for bonds, all on the LSE and at £5/trade.

However... why restrict yourself to just "investing in US stocks and bonds"? Unless you are American (and it doesn't sound like you are) or plan to retire in America, a globally diversified portfolio would probably be more suitable. Holding only US stocks means you ignore nearly half the world's equity markets. And in particular, holding US bonds when you expect to spend EUR invites a lot of extra and uncompensated currency risk that you could probably do without. Eurozone bonds would seem more appropriate.

zayuk
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Re: Choosing a broker for investing in the US

#115015

Postby zayuk » February 1st, 2018, 5:58 pm

TedSwippet wrote:
zayuk wrote:What would you do if you were in my position and what would the taxation hassle in either option be?

TD Ameritrade are a US broker, so won't offer an ISA. Vanguard, iShares, and others all issue Ireland domiciled ETFs that trade on the LSE but track US stocks and bonds. Will TD Ameritrade let you buy Ireland domiciled ETFs on the LSE rather than, say, US domiciled ETFs listed on the NYSE? If no, then best avoided.

Why? Well, if you hold 'non-reporting status' funds or ETFs in the UK and outside of an ISA, the tax on these is worse than if you hold ones with 'reporting' status. A few Vanguard US domiciled ETFs have UK reporting status, but many other US domiciled ones won't. In contrast, the more normal (for UK investors) ETFs found on the LSE all have UK reporting status. In a nutshell then, if you are a UK resident and hold 'offshore' funds or ETFs outside of an ISA or pension you suffer unfavourable UK tax rates.

On the other hand, an ISA would let you buy more or less anything you like -- Ireland domiciled ETFs, US domiciled ones, whatever -- and insulate you from UK tax issues. You might not be able to keep things that way if/when you leave the UK, perhaps having to sell, but up to that point it's all clean and easy. And if you decide to stay in the UK longer term, you will be glad that you used a UK tax shelter when you could.

If you will indeed only trade two or three times a year then trading costs are a non-issue. If this were me, and answering your question exactly as asked, I would open an ISA in an iWeb account (£25 one-off fee, a facet of Halifax Sharedealing) and then buy (say) tranches of VUSA or VNRT for equities and VUTY for bonds, all on the LSE and at £5/trade.

However... why restrict yourself to just "investing in US stocks and bonds"? Unless you are American (and it doesn't sound like you are) or plan to retire in America, a globally diversified portfolio would probably be more suitable. Holding only US stocks means you ignore nearly half the world's equity markets. And in particular, holding US bonds when you expect to spend EUR invites a lot of extra and uncompensated currency risk that you could probably do without. Eurozone bonds would seem more appropriate.


Thank you very much for the reply, especially the bit about the iWeb account with an ISA - it seems exactly the kind of account I would need if i proceed with the ISA option.

As to the ETFs without UK reporting status and taxes, I believe I can obtain a favourable tax policy due to the witholding tax laws between the US and my country of citizenship - Bulgaria. Where I reside most of the time should not be of any difference to TD Ameritrade.

Finally, I agree that a globally diversified portfolio would probably be more adequate but I have just started investing and before acquiring further investment expertise I thought I'd focus on one market for a while. I do consider moving to the US but for the foreseeable future I am planning on working in London. There is indeed a currency risk if I were to spend in EUR but wouldn't me taking my salary in GBP have a "hedging" effect if I have a portfolio in USD?

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Re: Choosing a broker for investing in the US

#115025

Postby TedSwippet » February 1st, 2018, 6:54 pm

zayuk wrote:Thank you very much for the reply, especially the bit about the iWeb account with an ISA - it seems exactly the kind of account I would need if i proceed with the ISA option.

Just to be clear, you can also have a non-ISA (general) trading account, or both, with iWeb for the exact same charges. It's just that you might as well use an ISA if you can once you become UK resident, at least up to the £20k/year annual input limit. It costs the same but with decent tax sheltering advantages.

zayuk wrote:As to the ETFs without UK reporting status and taxes, I believe I can obtain a favourable tax policy due to the witholding tax laws between the US and my country of citizenship - Bulgaria. Where I reside most of the time should not be of any difference to TD Ameritrade.

UK reporting status is only an issue if you hold US domiciled non-reporting funds while a UK resident. If you're planning on being a UK 'non-dom' you might skirt nasty UK non-reporting issues, but only permanently if you leave the UK before your non-dom status expires.

Now, if you were to hold these same US domiciled funds but live in Bulgaria I don't know what Bulgarian tax issues you might encounter, but the situation is more nuanced. The US/Bulgaria treaty tax rate on dividends is 10%. This beats the 15% that an Ireland domiciled ETF would pay internally to the US (and also the 15% US/UK tax treaty rate on dividends!), so in that sense you actually win a bit by holding US domiciled ETFs while living in Bulgaria. However -- and it's a big 'however' -- unlike the UK, Bulgaria has no estate tax treaty with the US. So you would be risking losing up to 40% of everything you hold above $60k in US estate taxes if you have the poor judgement to die while holding these funds or ETFs.

For you, tread very carefully indeed when holding US domiciled investment vehicles would be my advice.

zayuk wrote:Finally, I agree that a globally diversified portfolio would probably be more adequate but I have just started investing and before acquiring further investment expertise I thought I'd focus on one market for a while. I do consider moving to the US but for the foreseeable future I am planning on working in London. There is indeed a currency risk if I were to spend in EUR but wouldn't me taking my salary in GBP have a "hedging" effect if I have a portfolio in USD?

Yes, no, and maybe. It depends how much of your salary you (effectively) convert into USD by buying S&P 500 tracker ETFs, how long you will stay in the UK, how long you have to retirement, and a heap of "unknown unknowns" that will affect forex rates in the meantime. Note that it doesn't matter what currency the ETF itself is denominated in -- EUR, GBP, USD, ZWD(!). What matters is the exchange rate between the currency of the assets held by the ETF and the currency in which you will ultimately spend the proceeds.

Personally I would probably just buy VWRL for equity -- that's a little over 50% US and the remainder non-US, and hedge my bets a bit that way. I can't see why focusing on one market buys you anything when you can invest globally with a single ETF holding. And for bonds, probably IGLO or AGGG.

Finally, when you do arrive in London you should also pay some attention to whatever pension arrangement your company puts you into. A pension is a great UK tax shelter, but there is no access at all to it until you reach age 55 (and maybe higher in a couple of years). And once you leave the UK, a 'foreign' pension can become a recurring local country tax problem. Again, perhaps worth looking into how Bulgaria, or wherever else you might move to, treats UK pensions.

zayuk
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Re: Choosing a broker for investing in the US

#115052

Postby zayuk » February 1st, 2018, 8:03 pm

TedSwippet wrote:
zayuk wrote:Thank you very much for the reply, especially the bit about the iWeb account with an ISA - it seems exactly the kind of account I would need if i proceed with the ISA option.

Just to be clear, you can also have a non-ISA (general) trading account, or both, with iWeb for the exact same charges. It's just that you might as well use an ISA if you can once you become UK resident, at least up to the £20k/year annual input limit. It costs the same but with decent tax sheltering advantages.

zayuk wrote:As to the ETFs without UK reporting status and taxes, I believe I can obtain a favourable tax policy due to the witholding tax laws between the US and my country of citizenship - Bulgaria. Where I reside most of the time should not be of any difference to TD Ameritrade.

UK reporting status is only an issue if you hold US domiciled non-reporting funds while a UK resident. If you're planning on being a UK 'non-dom' you might skirt nasty UK non-reporting issues, but only permanently if you leave the UK before your non-dom status expires.

Now, if you were to hold these same US domiciled funds but live in Bulgaria I don't know what Bulgarian tax issues you might encounter, but the situation is more nuanced. The US/Bulgaria treaty tax rate on dividends is 10%. This beats the 15% that an Ireland domiciled ETF would pay internally to the US (and also the 15% US/UK tax treaty rate on dividends!), so in that sense you actually win a bit by holding US domiciled ETFs while living in Bulgaria. However -- and it's a big 'however' -- unlike the UK, Bulgaria has no estate tax treaty with the US. So you would be risking losing up to 40% of everything you hold above $60k in US estate taxes if you have the poor judgement to die while holding these funds or ETFs.

For you, tread very carefully indeed when holding US domiciled investment vehicles would be my advice.

zayuk wrote:Finally, I agree that a globally diversified portfolio would probably be more adequate but I have just started investing and before acquiring further investment expertise I thought I'd focus on one market for a while. I do consider moving to the US but for the foreseeable future I am planning on working in London. There is indeed a currency risk if I were to spend in EUR but wouldn't me taking my salary in GBP have a "hedging" effect if I have a portfolio in USD?

Yes, no, and maybe. It depends how much of your salary you (effectively) convert into USD by buying S&P 500 tracker ETFs, how long you will stay in the UK, how long you have to retirement, and a heap of "unknown unknowns" that will affect forex rates in the meantime. Note that it doesn't matter what currency the ETF itself is denominated in -- EUR, GBP, USD, ZWD(!). What matters is the exchange rate between the currency of the assets held by the ETF and the currency in which you will ultimately spend the proceeds.

Personally I would probably just buy VWRL for equity -- that's a little over 50% US and the remainder non-US, and hedge my bets a bit that way. I can't see why focusing on one market buys you anything when you can invest globally with a single ETF holding. And for bonds, probably IGLO or AGGG.

Finally, when you do arrive in London you should also pay some attention to whatever pension arrangement your company puts you into. A pension is a great UK tax shelter, but there is no access at all to it until you reach age 55 (and maybe higher in a couple of years). And once you leave the UK, a 'foreign' pension can become a recurring local country tax problem. Again, perhaps worth looking into how Bulgaria, or wherever else you might move to, treats UK pensions.


Thank you very much for the advice! A final question - do you think I can and is it feasible to open say an iWeb (or similar) regular account until I become a resident and then convert it to an ISA account? I have certain reluctance to opening/closing positions when starting my internship due to compliance rules and other reasons.

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Re: Choosing a broker for investing in the US

#115071

Postby Alaric » February 1st, 2018, 9:05 pm

zayuk wrote:A final question - do you think I can and is it feasible to open say an iWeb (or similar) regular account until I become a resident and then convert it to an ISA account?


It's part of the rules defining an ISA that you cannot convert an existing account. You cannot move stocks directly into an ISA either.

In practice Brokers will offer parallel taxed and ISA accounts. It's feasible then to open a Share Dealing account and then later an ISA Account. You might run foul of requirements to supply a UK National Insurance Number if you aren't yet working in the UK.

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Re: Choosing a broker for investing in the US

#115081

Postby TedSwippet » February 1st, 2018, 10:02 pm

Alaric wrote:
zayuk wrote:A final question - do you think I can and is it feasible to open say an iWeb (or similar) regular account until I become a resident and then convert it to an ISA account?

It's part of the rules defining an ISA that you cannot convert an existing account. You cannot move stocks directly into an ISA either.

In practice Brokers will offer parallel taxed and ISA accounts. It's feasible then to open a Share Dealing account and then later an ISA Account. You might run foul of requirements to supply a UK National Insurance Number if you aren't yet working in the UK.

Right. Open an ISA and you may well get a normal trading account alongside it anyway at no extra charge.

As for opening an account before moving to the UK... most (and perhaps all) domestic UK brokers and platforms insist that you are a UK resident before letting you open any type of account, ISA or otherwise. Multinational brokers such as Interactive Brokers and Saxo generally don't have a problem with folk who have international lifestyles, and are actually pretty good about people transitioning between countries, but both would be quite a bit more expensive than iWeb and similar UK only brokers, and neither will offer ISAs.

If you have existing positions in any tradeable investments, you might consider selling and re-buying to reset any cost basis for UK capital gains tax purposes. Otherwise the UK could cheerfully charge you capital gains tax on gains that built up long before you arrived in the UK.

Finally, if you face regulatory restrictions on what you can or cannot buy once you are in employed the UK (it sounds like you will be working for a UK financial firm?), it will be hard for you to bypass these by setting up any UK account before actually moving here. Perhaps you can arrive a month or so before you start your job and set up the accounts you want then -- might that work? Of course, this could be a bit tricky, not least in terms of timing. I don't know what type of restrictions you are under, and also have no firsthand experience of that type of problem myself.

zayuk
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Re: Choosing a broker for investing in the US

#115511

Postby zayuk » February 3rd, 2018, 5:38 pm

Thanks for the advice everyone! I think I will wait for the eligibility to open an ISA account as it seems it will be a lot less hassle overall plus the tax benefits will be good for the long run.

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Re: Choosing a broker for investing in the US

#117629

Postby DiamondEcho » February 12th, 2018, 3:09 pm

TedSwippet wrote:As for opening an account before moving to the UK... most (and perhaps all) domestic UK brokers and platforms insist that you are a UK resident before letting you open any type of account, ISA or otherwise. Multinational brokers such as Interactive Brokers and Saxo generally don't have a problem with folk who have international lifestyles, and are actually pretty good about people transitioning between countries, but both would be quite a bit more expensive than iWeb and similar UK only brokers, and neither will offer ISAs.


I'm currently going through the hurdles of establishing ID with a UK bank, evidencing address etc abroad and it's not easy as a) my local bank statements are only online (not the required hard-copy) b) the tenancy agreement and utilities are in the name of my wife's employer. c) I have foreign residency, but am not employed here (I'm self-employed/work from home, and am legally outside local taxation/reporting). I've been going 'round and around' on this for many weeks, a damned nuisance.

What I'd do if I were Zayuk is find the a/c application form on the website of the broker he currently favours. That should be explicit on nationality/residence status, AND the documentation required to establish your ID etc.
I'd be surprised if they'd let you open a UK a/c before you were legally UK resident and meet their ID requirements, especially one incentivised vs UK tax like an ISA. Put it like this, I'm Brit, currently resident abroad and it's my understanding that I'm not eligible to open an ISA, at least not until later this year when I will become resident in the UK again.

As mentioned a while back I use Interactive Brokers. I opened the a/c when living in Germany, maintained it later on moving to Asia, and again later on moving to the Middle East. They seem used to customers moving country so it's no major challenge, but establishing ID at the start is the challenge IME.
[But as TedS notes IntB do not offer ISAs etc, so this is just to illustrate the point on ID. FWIW IDR IntB being expensive, when I opened the a/c the trade fee was £6 on UK/LSE equity trades sub £50k, and it might well still be that price].

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Re: Choosing a broker for investing in the US

#117631

Postby DiamondEcho » February 12th, 2018, 3:11 pm

zayuk wrote:Thanks for the advice everyone! I think I will wait for the eligibility to open an ISA account as it seems it will be a lot less hassle overall plus the tax benefits will be good for the long run.


Might be a lot easier. When you factor in say the hassle of getting a Brit Embassy in Sofia certified copy of your passport etc., opening the a/c from abroad is challenging.

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Re: Choosing a broker for investing in the US

#188156

Postby DiamondEcho » December 19th, 2018, 8:18 pm

Zayuk is Bulgaria resident, and does not appear to have a UK bank a/c.

Re: suggestion above re: DeGiro, problem is they say:
'At this time, you are able to use bank accounts from the following countries to open an account with DEGIRO:
Accepted: EU countries (with the below exceptions), Norway, Switzerland
Not accepted: Bulgaria, Croatia, Cyprus, Estonia, Latvia, Lithuania, Malta and Romania.
For an account on the UK platform, we require a mainland UK bank account in GBP to be registered to your DEGIRO account. Unfortunately we cannot accept transfers from UK overseas territories or Crown dependencies such as Jersey, Guernsey, Gibraltar, or Isle of Man.'

https://www.degiro.co.uk/helpcenter/faq ... lient/1059

I have spent many years as an expat, including most of the last decade and know first hand how difficult it is to open a brokerage a/c to trade UK/other instruments if you are non UK resident. EVEN if you have a UK bank account and passport, but simply live abroad. This was previously discussed at some length on the Expats board, maybe Zayuk might look there, as I suspect with his passport and lack of UK residency he faces perhaps an insurmountable challenge. (And no 'everyday' broker offering cheap trading, set up for Brits in the UK, or EU citizens from non-blacklist countries, are likely to help IME)


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