US Brokers - Tax liability

[Bud Fox]

US Brokers - Tax liablity

Can someone pls tell me if trading through a US Broker in US stocks makes you liable to US capital gains tax (assuming your winning).

Im thinking of opening an IB account, im a gulf expat but im not sure whether i'll have to fill out some kind of IRS form.

There seems to be quite a few guys on here using IB. can anyone help?

Thanks

Bud

 

[JonnyT]

In the UK you get exemption using a W8 form.

Thats do to agreements between the respective Governments.

In most cases US citizens have to pay US tax no matter where they are in the world so spinning it round I would guess there is a good chance that taxes will be payable unless the place you reside has a special agreement and relationship with the US.

You are not in Iraq or Afganistan are you?

JonnyT

 

[Trader333]

Yes you are liable for tax and it can be capital gains or income depending on how the Inland Revenue view your trading activities. The tax will all depend on where you are considered to be domiciled. When you open an account with IB you will have to fill in W8-BEN.



Paul

 

[Bud Fox]

Thanks for the replys
Sorry i didnt make my status quite clear.
Im a UK citizen, resident in Bahrain over 5 years. I know im liable to UK Capital gains if i use a UK broker. Due to an inland revenue rule where your agent(broker) is based in the UK.
But im not sure if the same applies with US brokers.
I know the easy thing to do is find an offshore broker- but these all appear to be dodgy/ fly by night operations.

Bud

 

[nomish]

so if you have everything offshore that means u dont have to declare tax if u dont bring the money back into uk ?

 

[BBB]

Bud -

You pay tax on US earnings as soon as you bring the cash into the UK. As you wont, you will be tax free.

This is one reason why I will be moving to Euroland soon.

Better standard of living, cute chicks, less expensive, no tax. QED. I will miss a good pint though!

 

[chump]

Nomish,
No that isn't what it means at all. This is an issue of where you are tax resident ,not where you bank. If you are tax resident in the Uk you are liable for your CGT here. Putting it in an offshore bank a/c does not negate that liability. Usually what it means is that that person is hoping that the the nice taxman does not find it. Large distinction between the two points.

On the facts above our friend is not liable for tax here. I would have thought he was liable for tax in Bahrain. I do not know if Bahrain is party to any double taxation agreement with either the UK or USA. Its' not listed in my book.

 

[nomish]

ic thanks for that

so say you make over the CGT threshold which is like 7 grand or something you have to pay 40% tax on correct?

but what if you trade under a limited company.

You buy 50 grand of stock, sell for 55 grand that 5k profit (minus broker costs)...how would it be taxed?

still under 40% then taxed again under profit again for business tax.

Im just wondering if it's benfitial to have a limited company for tax reasons? it would also be benficial to write of expenses such as data feeds, net connection, hardware/software and related trading charges?

any ideas?

 

[frugi]

CGT for private individuals is taxed as if it were your top slice of income not by flat rate, so it will not necessarily be 40%.

For 2004/5 the bands are as follows:

CGT allowance £8200

Income tax personal allowance £4745
then 10% up to £2020 above this
then 22% from £2021 up to £31400
then 40% above that

I am awaiting decision from taxman as to whether I am a private investor subject to CGT or a self employed trader subject to income tax and National Insurance. If it is the latter I will be unlikely to set up a limited company as, from my position at least, it does not seem to confer any advantages over being a sole trader. However this may not be the case for everyone. I believe that it is generally accepted that it is difficult to convince the Revenue that full time trading counts as self employment which would suit me very well as for a private investor the tax threshold is higher (CGT only) and there's no NI to pay.


If you trade as a company or a sole trader you can deduct expenses incurred by your business such as you mention (data feed, charts etc.) from your taxable income but as a private investor you can only deduct cost of transactions from your capital gains. Losses can be deducted in both cases, though I think you can carry CGT losses forward for longer (?)

 

[Trader333]

In my view it is better to class trading profits as income or set yourself up as a company but it depends on your situation at any given time.

For example you can offset any capital gains losses from your past against gains you make in the present. So if you had made a £40K capital loss in your past then you can offset this before having to declare any gains.

But if you are making say £50K a year from trading then you would be better classing it as income as there are personal allowances and graduated tax levels.

Until recently it was by far the best option to be a limited company as you paid no tax on the first £10K of profits and you could offset all expenses as well. The lovely Mr Brown killed that in our latest budget and I have yet to work out which is now the best option.


Paul

 

[donaldduke]

I think you pay 22% (or whatever the low band is these days)
if you are low rate tax payer, then 40% for the profits when
you hit the higher band.

If are trading full time you will initally be a low rate tax payer
(unless you have rental income or have a lot of cash
earning interest)
if you have another full time job you might be in the
40% band straight already.

There is also a 10% band for the first 2K over the 7K if you
dont have any other income.

 

[frugi]

Paul,

But if you are making say £50K a year from trading then you would be better classing it as income as there are personal allowances and graduated tax levels.

I believe in most cases regardless of profits you are better off being taxed under CGT as the allowances are more generous and, assuming no other income, profits are taxed under the same graduated scales as income tax. Also no NI to pay. Your deductible expenses under income tax would have to be very large to overcome the advantages conferred by CGT treatment.

Have I missed something obvious?

 

[Trader333]

Frugi,

I meant from a self employed standpoint and I may check and see how it would apply to those who are already employed as there may still be advantages to declaring it as income.


Paul

 

[theknifemac]

If you go down the limited company route then you have to be very careful as the taxman is cracking down quite hard on single director companies.

In my former life I had my own limited company which payed me a small salary and larger dividends. The salary was hit by employers NI and employee NI plus tax etc. The taxman brought in IR35 which clamped down on people paying the majority of their income as dividends if they thought the limited company was used for disguised employment. The IR are also looking at limited companies which pay out dividends to husband and wife directors to efficiently use both tax allowances.

I'm a bit rusty on the difference between a sole trader and a ltd company, but with a limited company you could offset VAT paid by VAT charged but I guess with a trader's ltd co there would be no incoming VAT so you wouldn't register for VAT anyway.

Data / software costs could be offset before tax for sure. And as Paul said any losses could be offset against future gains for tax purposes.

So what are the choices ?

Sole trader
Limited company
Declare all income as capital gains ?

Has anyone got any good advice on this side of things ?

Thanks

Stew

 

[BBB]

Yes - Get out of the UK!

Go live in Euroland. Little/no tax, and you can always fly back to the UK at weekends or whatever with flights being so cheap!

I live in Putney, London, and it takes me just as long to get to Bristol or Birmingham than it does to get to Paris or Frankfurt.

 

[hampy]

BBB, Could you elaborate?
Do you know how trading for a living would be taxed in the
Eurozone?
Thanks,
hampy

 

[BBB]

Well, I may be wrong, but if you take residency in Eurozone, you pay no income tax. You also need no visa or anything. You can just sling your hook, buy a villa on the coast somewhere (+ pool for peanuts by London standards) and pay no tax.

I've yet to investigate it fully, but I have several mates who are IT contractors. They have worked in Euroland for UK, American and Euro companies over there, but never had to pay any tax despite spending all their time there. I think the only requirement is that you leave the country for 24 hrs every 3 months or something silly like that.

Just think - no Tony bLiar, sunshine, fine food and wine every day, beautiful chicks everywhere, the list of benefits is endless IMO. Just got to get round my girlfriend though. Don't think she'll like the idea. She seems to think London is utopia (she's Brazilian)

If anyone has definitive answers Id be grateful too!

 

[Trader333]

BBB,

Can you give examples of where you mean when you say Eurozone ?


Paul

 

[knorrie]

BBB - be sure to look into this carefully. I contracted in Germany several years ago and got in with the ex-pat/contracting community. There were all sorts of wonderful characters and stories of various tax avoidance schemes, like guys taking suitcases of cash into Switzerland etc.

However at the time (don't know what the status is now), it was perfectly legitimate to avoid paying tax if you were a) non-resident in the UK and b) not resident anywhere else for more than 6 (or was it 12 - hell this was 17 years ago now) months at a time. So if you genuinely just got 3 or 6 month contracts and moved around for each one, then fine, no tax.

However what several guys tried on was staying at the same client on rolling 6-month contracts for years at a time, without moving house. This didn't stand up to scrutiny, usually as a result of a tax audit at the client, which actually seems to happen quite frequently over there compared to here. One guy got stopped at airport departures when they scan your passport in and got marched off to the bank to settle his huge tax bill in cash or else stay in the cells - they even did this to another guy for non-payment of parking tickets. And a friend of mine from the UK who left Germany for a life in the US got into a dispute with his landlord on moving out of his flat. He was stopped at the airport with his wife + kids waiting to get on the plane, and had to hand over several thousand in cash, completely humiliating (and in fact totally unjust but I won't go into that).

If you think the authorities are bad here, my advice to you is don't go to Germany

KenN

 

[chump]

BBB,
"Well, I may be wrong, but if you take residency in Eurozone, you pay no income tax".
You are wrong. See my post above .It applies.

In a past life I advised on tax etc and administrated many of the contracts that 'your' IT friends had. As such I know exactly what they are telling you. As I said before, it is based upon what they think they can get away with rather than what is their legal liability. That liability always rests with the individual and hence so does the risk of not meeting it. To be frank most IT contractors never really understood the way in which this liability arises, or maybe they just 'chose' not to understand.

Knorrie,
"However at the time (don't know what the status is now), it was perfectly legitimate to avoid paying tax if you were a) non-resident in the UK and b) not resident anywhere else for more than 6 (or was it 12 - hell this was 17 years ago now) months at a time. So if you genuinely just got 3 or 6 month contracts and moved around for each one, then fine, no tax".
This is exactly how most contractors misunderstood how their liability arises. Not legal at all.


Knifemac,
IR35 does not apply to this activity. In effect IR35 tries to establish a relationship between the individual and the person (client) they are working for on the basis of if you took out all the middlemen (Ltd co,agency etc) could the relationship be said to be the same as that you would expect to find between an employee and his employer. This to be distinguishable from someone who was supplying a service which was a business in its' own right. Its' quite complex ,but would not apply to this area of activity.

Cheers