UK investors losing out on foreign dividends tax

Failure to reclaim tax on foreign dividends is costing UK based investors around £1.1 billion every year, it is claimed.

Tax specialist taxback.com has calculated that the massive loss on dividend withholding tax (DWT) is due to most foreign countries imposing a tax before dividends are paid to overseas share holders.

Where the UK has a double taxation agreement, investors are entitled to reclaim the difference between the rate the foreign country normally applies and the reduced rate specified in the relevant treaty.

‘We’ve looked at the figures and this is a huge issue. Recent research suggests that only 7% of DWT is reclaimed globally and if you translate this to those in the UK with overseas assets in their portfolios, the loss could be upwards of £1 billion a year,’ said Seamus Murphy, senior tax manager at taxback.com.

As an example, he said that Swiss dividends are paid to UK residents minus a 35% DWT, while the terms of the UK/Switzerland Double Tax Treaty (DTT) limit the liability to 15% for UK shareholders owning less than 10% of the Swiss company. On a £1,000 dividend this allows £200 of the £350 tax paid to be reclaimed.

The situation is even more attractive for UK shareholders who own more than 10% of a Swiss company or for UK Pension Schemes both of which are entitled to reclaim the full 35% of DWT if it has been applied by the payor.

‘Many in the UK either don’t know they can reclaim or think it is too much hassle. But our system is straightforward and reclaims can go back at least three years and in some cases up to six years so will nearly always be worth doing,’ added Murphy.

He gave an example of three groups of retail investors who could be in line for reclaims: members of share plans where the parent company is a foreign entity, ISA investors whose plans are exempt from UK tax but not foreign DWT, and investors in UK companies that are subsequently taken over by foreign companies.

‘Cadbury was recently taken over by Kraft so UK investors should now be holding US shares, each of which are likely to pay around $1.16 in dividends this year. It is likely many investors will see 30% of this disappear in DWT without realising that half of the tax taken can be reclaimed,’ he explained.

‘And it is worth stressing that this is only the retail part of the market. There are many High Net Worth individuals out there, Pension Companies and Life Insurance Companies who are also entitled to claim refunds, so the amount of DWT being left on the table could be enormous,’ he added.

Taxback.com believes the reclaim potential is so great that it has launched a new service for UK investors to reclaim DWT. ‘Even when you take into account the many switched on investors have done the paperwork in major jurisdictions like the US, still more than half is likely to be going unclaimed,’ said Murphy.

‘The money is there but many don’t realise while those that do may not know where to start. We have already trialled this in Ireland with great success and the potential in the UK is far, far bigger,’ he added.