Your ISA In The US | Everything You Need To Know
This article is intended for US residents, or individuals moving to the US, who hold UK ISA accounts, and answers the following questions:
What happens to my ISA when I leave the UK?
How is my ISA taxed in the United States
Does my ISA stay tax-efficient in the UK?
Can I still contribute to my ISA from the US?
What is a PFIC and how to spot them
Solutions available for US residents
I’ve just left the UK - what happens to my ISA?
There are 2 scenarios that British expats are faced with when moving to the United States with an existing ISA:
01 Nothing Happens To Your ISA
The first scenario is that absolutely nothing happens to your ISA. Your existing provider may have no issues with you keeping your ISA intact as you live, work or retire abroad in the United States. However, we advise all clients to update your existing UK address with your ISA provider to avoid any potential issues when it comes to taking money out, or looking to contribute more.
02 Your Provider Informs You That Your Account Will Be Closed
More commonly, your provider will give you a 60 day window after which your assets will be dis-invested from your ISA account and the funds will move into cash, meaning you cannot access financial and equity markets for growth within the account.
This happens commonly with providers like Hargreaves Lansdown and AJ Bell.
How is my ISA taxed in the US?
Your ISA will be taxed in the United States subject to local capital gains tax rules, which are scaled depending on your income level, but generally preferable to tax rates in the United Kingdom. For a full breakdown, so our financial advice page for expats in the United States here.
Note, that whilst the applicable tax is capital gains tax, you will almost certainly be exposed to additional punitive tax rates as your ISA will likely hold something called Passive Foreign Investment Companies (PFICs) which we will address later in this article.
Does my ISA stay tax free in the United States?
Your ISA does not retain the tax benefits you receive in the United Kingdom in the United States. Essentially, the IRS will ‘look through’ the ISA wrapper, meaning it is just classed as any other kind of investment account which does not offer special tax treatment.
Can I contribute to my ISA as a US resident?
No, if you are not fiscally resident in the United Kingdom (i.e. if you are not a UK tax-payer) you cannot continue to contribute to a tax-efficient ISA account as an expat. Note, other options are available locally which you may be able to utilise, depending on your wider financial position.
What is a ‘PFIC’ and how can I tell if my ISA has PFIC investments?
A PFIC (passive foreign investment company) is essentially something classed by the IRS as a foreign investment company which generates a significant amount of it’s revenue and interests from operations overseas. You can see the legal definition of a PFIC here.
Almost all UK ISA funds and investment funds will be classed as PFIC by the IRS, which means that on top of the usual capital gains tax rate, there is an additional punitive rate applied.
Not only is a punitive tax rate applied on any growth, but the actual reporting of PFICs is incredibly complex, time consuming and costly - and will often involve large filing bills from US accountants and tax advisers due to the complex nature of how they are reported.
Our advice is to consult with a regulated financial adviser to ensure all of your UK assets (whether that’s an ISA, Unit Trust or retirement accounts) remains fully compliant and transparent in the eyes of the IRS.
One quick, simple and easy way to spot a PFIC in an ISA account is checking the investment security identification number (ISIN) of the underlying investments you hold. If this begins with GB, IE, LU, you are almost certainly investing in what would be classed as a PFIC.
Note, typically speaking, individual shares in companies (like buying Apple, HSBC, Natwest etc.) would not be classed as a PFIC as it does not meet the relevant rules. However, many investors do not want to have a portfolio consisting of only single shares due to the heightened risk and volatility involved in the investments.
ISAs For US Residents & ISA Management In the United States
Fortunately, there are solutions available for US residents which means you can keep the tax-efficiency of your UK ISA account intact, at the same time as avoiding investments into PFIC funds and the tax consequences associated.
At The Wealth Genesis, all our advisers are UK and US qualified, meaning our team has expert and specialist knowledge of cross-border planning between the United Kingdom and the USA.
By utilising expat-specific accounts, we can keep your ISA invested, so you do not lose any allowances on the chance you may return to the UK at a future date. On an ongoing basis, our advice team will manage your portfolio and ensure full compliance in both the US and UK.
