Compare UK SIPP, ISA and Brokerage Accounts for U.S. Tax
For taxpayers who previously lived or worked in the United Kingdom, they may have a diverse range of investments, including SIPPs, ISAs, and brokerage accounts. While some of these investments may enjoy tax-deferred status in the U.K., that does not mean they will also avoid taxes under U.S. tax law. If the U.K. taxpayer also becomes a U.S. person for tax purposes, they may become subject to tax on the income, even though they may not be subject to tax under UK laws. When it comes to UK investments, there are three common types of investments that taxpayers in the UK have (excluding employment or state pension):
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SIPP
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ISA (Cash vs Stock and Shares, and
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Brokerage Accounts
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Let’s take a brief look at the differences between these types of investments and how they may be impacted for U.S. tax and reporting purposes.
SIPP (Self-Invested Personal Pension)
The first thing to keep in mind is that the United States and the UK have a very robust tax treaty when it comes to pensions. The SIPP is a very common investment vehicle that many taxpayers who worked in the UK have used, but how the SIPP originated with the taxpayer may vary from one person to the next. For example, some taxpayers may create their own individual SIPP (especially early in their careers) to help plan for retirement. Other taxpayers may have had an employment-type pension or multiple pensions and rolled them all together into a SIPP.
In general, since the sip is a pension, the growth will not be taxable until it is distributed. Likewise, even if the SIPP has various foreign mutual funds and ETF’s in it that would qualify as PFICs, most taxpayers would rely on the regulation that allows taxpayers to exclude having to file PFIC Form 8621 for funds within pension plans in treaty countries.
ISA (Individual Savings Account)
Unlike the SIPP, which is categorized as a pension, the ISA is a type of investment that is used to supplement retirement. Technically, the ISA is not considered a pension, which means it is treated for tax purposes differently from a pension. With an ISA, if it is a cash ISA, then generally it is taxable as it grows, and usually the income is limited to interest income. If instead it is a stock and shares ISA, then it depends on the type of investments contained within the stock and shares ISA. If it contains foreign mutual funds and ETFs, then the dreaded PFIC Form 8621 may be required to report each fund investment within the ISA. In addition, if funds have been redeemed, switched out, or sold, there may be excess distribution calculations required as well, even though technically the distributions have not been made out of the ISA.
Brokerage Account
The brokerage account is typically reported on the FBAR and Form 8938, and the income associated with the investments is taxable. The only hitch in the giddy-up is whether there are PFICs within the brokerage account. Similar to the explanation for the stock and shares ISA (above), foreign mutual funds and ETFs oftentimes will qualify as PFICs, which means the individual funds must be reported on Form 8621 — in addition to the accounts being reported on the FBAR and Form 8938. Likewise, if any of the funds are sold, redeemed, or switched out — or a significant increase in the value of dividends distributed from the fund — the income may become subject to an excess distribution calculation.
Late Filing Penalties May Be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
Hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting can be overwhelming for Taxpayers trying to sift through the false information and nonsense they find in online research. Only a handful of attorneys worldwide are Board-Certified Tax Specialists who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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