An Anglo-American treaty signed last week will remove taxation on both UK pension fund investments in the US and on expatriates' occupational pensions.
The treaty – which still requires ratifying by both UK and US governments – is also expected to bring to an end the double taxation of American and British expatriates.
The tax penalty currently deters many US nationals working in the UK from joining UK pension schemes.
Bacon & Woodrow associate in the investment practice Michael Robarts said: “I know of many multi-nationals, both UK and US-owned, where the holy grail is to have a pension environment where people can move to a different job within the group, but continue to contribute to the same pension scheme.”
The tax-treaty – signed by chancellor of the exchequer Gordon Brown and thought to come into effect within two years – will also mean the end of double taxation on pension payments, special lump sum pension payments and also on annuities.
The treaty will also scrap the 15pc withholding tax on dividends from investments held by UK pension schemes.
But Britannic Asset Management head of US equities Terry Ewing said: “The importance of dividend yields has diminished in our view. They were around 4pc 10 years ago and that figure has diminished to 1.3pc – 15pc of 1.3pc is not a lot.”
Ewing added: “Many companies do not even pay a dividend and prefer to have the flexibility of buying back their own stocks The nature of the market has changed over the last ten years.
“You will have probably been rewarded more for investing in companies with lower than average dividend yields and faster growth prospects.”
Another benefit of the treaty is that UK companies will no longer have to pay a 5% tax on dividends earnt by their US subsidiaries.
PriceWaterhouseCoopers international tax partner Peter Cussons pointed out that as most UK equity companies had subsidiaries in the US, this should increase overall UK equity returns.
NAPF spokesperson said: “At an individual level the overall tax differences are minimal and therefore in investment terms for pension funds there will be little impact. But not too much pension fund investment goes from the UK to the US, but maybe this treaty will open it up.”
By David Rowley
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