Selling Coca Cola From My ISA and Moving It To My SIPP Portfolio – US Stocks Dividend Withholding Tax


Coca Cola is a never sell stock. It is one of those businesses that has been around for 100 years and will be around for 100 more. The soft drinks industry doesn’t change fast. My grandad drank Coke, so did my dad and so do I. I am sure my kids and grand kids will do too. They are not many companies with the heritage, resilience and staying power of coca cola and that is why it is one of the companies on my stock list; a list of the greatest companies in the world that can be held for year and years and will compound your money nicely over time.



Coca Cola is exactly the type of company I look for; it’s got a strong band, it has predictable sales, it produces a product that consumers have to buy over and over again, it earns high returns on capital and it is embracing an asset light business model. But I am not here to talk about Coca Cola the business. I am writing this post from the vew of tax efficiency.

 

I bought 25 shares in Coca Colas for my ISA portfolio in 2016 paying $41 a piece. Over this time period, I have received £102 worth of dividends from the beverage giant giving me a cool yield on cost of 12%. In total, my return from coca cola stock has been just over 25%. Not the best but It has done exactly what it was supposed to do, bring a defensive quality to the portfolio.

 

Whilst an Investment Savings Account, or ISA for short is tax efficient is the sense that I do not pay any income tax or capital gains tax on my stock holdings within this portfolio, there is a slight quirk in the tax code which means ISA’s are not an efficient way to hold shares in US listed companies (or many overseas listed shares for that matter).

 

Companies listed in the US have dividend withholding taxes applied to them by the US government. This means that if you are not resident or have a brokerage account in the US, you will need to pay withholding taxes on any dividends received. You do not pay it personally, it is done centrally for administrative ease. But it does mean that you receive your dividends after taxes.

 

The current rate of US dividend withholding taxes is 30%. But this is reduced to 15% for UK residents who have completed a w8-ben form. To find the dividend withholding tax rates of other countries, read this post.

 

So as an example, if coca cola declares a dividend worth £100 , I will only receive £85 as the other £15 is taken as a tax by the US government. This is why holding US stocks in a ISA or regular dealing account is a nightmare.

 

(They are a few exceptions to the rule. For example, Phillip Morris which is a an “80/20 company”. An “80/20 company” is a U.S. company where 80% of gross income for a specified period is generated from active businesses outside the United States. Therefore dividends from Phillip Morris are not taxed at these high rates.)

 

On the other hand, due to the way the tax code is written, holding US stocks in a pension account also called a SIPP, provided you have completed the relevant W8-BEN forms is more tax efficient. This is because there is no dividend withholding taxes applied to dividends from US listed stocks in a SIPP account.

 

From this tax efficiency point of view, it was a no brainer moving my stock in Coca Cola, one I bought for its income and defensive characteristics rather than growth, to my SIPP account. I will be saving 15% on any dividends paid. And we all know ow compounding works. The amount saved on dividend withholding taxes will snowball over time and I will have a much higher return holding Coca Cola stock in my pension than in an ISA.



The sale of Coca Cola stock from my ISA has reduced my annual dividend income figure but it has also free’d up some capital which I subsequently dumped in to another consumer staple behemoth, Unilever.

 

With every new post, I seem to be stating that I bought more shares in Unilever. I’ve now bought three tranches of Unilever shares thus making this fast moving consumer goods company an outsized position in my portfolio. I know over the past couple of weeks I have said that I will do a post on Unilever and I can promise you its in the works. I should publish it within the next week or two so be sure to check back.