Dividends and withholding tax query

[LeoTrader]

Hello, 

 

I hope someone can explain this to me because I've searched high and low for the answer online and on IG's website and community to no avail. So I emailed the help desk but their reply only confirms what I already know and doesn't explain what I don't. 

 

Regarding shares and indices, I understand (or at least I believed I did) that dividends paid on a spread betting position will be automatically adjusted as a 'dividend adjustment' on my account. When a stock/index pays a dividend, its price will be affected by the dividend payment and hence my P&L will be affected. To offset this gain or loss, IG will make a dividend adjustment into my account by the same amount of points the underlying stock/index has changed. Meaning I'm not materially gaining or losing from dividend payments, so wouldn't acquire any tax liabilities for them. 

 

My confusion arose after I opened a spread bet on a US equity for the first time and was emailed by IG requesting my urgent completion of a W-8BEN form: 

 

"You recently opened a position on a US equity, without being documented with a W-8BEN or W-9 form. This means that your position is subject to withholding of tax of up to 30% on any dividends, along with a potential admin charge of $50. 

 

This is because of new regulations that came into effect on 1 January 2017, under Section 871(m) of the US tax code, which treat ‘dividend-equivalent payments' on US equity derivatives – including spread betting and CFDs – as US-source dividend income. An individual would be subject to 30% withholding tax under normal US rules. However, a US-UK tax treaty exists which entitles a UK tax resident to pay only 15% of the tax. 

What do I need to do?
Please complete the correct form as soon as possible to avoid paying unnecessary tax and admin charges. The amount of withholding tax you'll pay on your dividends could reduce from 30% to 15%." 

 

To me, that reads as though I will receive an income from dividends and as such do have to pay tax on that income, at least on US equities. Not only does this throw up questions on the tax implications of spread betting but how my P&L would be affected by dividends and withholding tax. As far as my lay understanding of other forms of withholding tax goes, it is deducted at source, hence the name. If that's the case here and I receive dividends less the withholding tax, I still don't understand how my P&L and account balance would be affected in this scenario (left with a gain/loss?). 

 

Is there a knowledgeable person able to clarify all of this for me please? As any mention of tax in a query to IG results in being advised that they're not regulated to give tax advice. 

 

Many thanks in advance. 

 

[LeoTrader]

Don't all rush at once! :smileywink: 

 

That was a very long post so put simply: how does withholding tax affect dividend adjustments on US shares? 

 

I'm guessing that this is a mystery I'm only going to learn after the fact. For now, I'll carry on trading US shares and see what happens. Wish me luck! :smileysurprised:

[Ludwik Chodzko-Zajko IG]

Good morning!

 

US withholding tax would apply to dividends received on all US shares, including positions on a spread betting account. If for example, you held a position which was entitled to a gross (before tax) dividend of $10, you'd receive either $7 or $8.5 (paying 30/15% tax at source) depending on whether you've completed a W8 form and are resident in a treaty country. 

 

In p&l terms this could mean that you're slightly offside when long, as the share price does tend to fall by the gross amount of the dividend, although many factors are obviously at play (e.g buyers pushing up the share price pre- divi). When short you'd pay the gross amount (100%).

 

Note that this applies to equities only. When long a stock index you would not incur any withholding. and therefore receive / pay the gross amount each time.  As an FYI the only stock index where you'd pay withholding tax is the Swiss blue chip.

 

In terms of personal tax liability, dividends received on a spread betting account would not ordinarily create a UK tax liability, as they're received through a spread betting account in which you hold a derivative, not the underlying stock. I would add a caveat that we're not able to give specific tax advice, but under usual circumstances this would be the case. 

 

I hope this all makes sense. Feel free to let me know if you need any more info/ clarification. 

 

Thanks!

 

Ludwik

[LeoTrader]

Hello Ludwik, 

 

Thank you very much for your explanation. It confirms what I thought was the case but couldn't find in writing anywhere to know for sure. You've clarified everything I wanted to know. :smileyhappy:

 

Perhaps your explanation could be used on the IG Support Portal to help others too. 

 

Many thanks!

[Ludwik Chodzko-Zajko IG]

My pleasure! 

 

Glad I could be of help, and apologies for the lack of clarity given in previous responses. Posting this on the help and support portal is a very good suggestion, IT are currently in the process of creating a newer page which feeds through to here, but I'll certainly feed this back.

 

Please do feel free to continue using the community for any general queries, we appreciate it!

 

Ludwik