Is a UK ISA Taxable in the US? How is it Reported?

Is a UK ISA Taxable in the US? How is it reported?

U.S. Taxation of UK ISA

The U.S. Tax rules for matters involving international and offshore assets and investments can be complicated. This is especially true for the UK ISA, because the ISA (Individual Savings Account) is a tax-free investment in the UK. Even though the US and UK have a DTA Tax Treaty, the rules can still be unnecessarily complex. And, while the ISA is oftentimes a component of retirement planning, the ISA is not a per se pension account, so it does not receive the same treatment as a pension.

In addition, the reporting rules are also complex, and may involve:

      • FBAR

      • Form 8938 (FATCA)

      • PFIC

      • Form 3520

For U.S. Persons who own an ISA in the UK (or any non-U.S. Country), the U.S. Tax ramifications and reporting requirements may be different than the foreign country.  We will briefly summarize the tax and reporting of a UK ISA.

U.S. Tax on ISA

Why are the tax rules complicated?  Because while the investment may grow tax-free in the foreign country, the U.S does not necessarily recognize the tax-free status.  And, since the U.S. taxes individuals on their worldwide income, the IRS rules can get fairly complex for an otherwise not-so-complex UK investment vehicle.

Is the UK ISA Taxable?

An ISA is an Individual Savings Account.  There are various types of versions of ISAs, such as Cash, Stock, and other types of investments (such as a Lifetime ISA, which is used in anticipation of buying a first home, or retirement or Junior ISA for kids under 18).

As provided by Barclays:

      • “An ISA is an Individual Savings Account – it allows you to save or invest money in a tax-efficient way.

      • An ISA (individual savings account) is a tax-free savings or investment account that allows you to put your ISA allowance to work and maximize the potential returns you make on your money, by shielding it from income tax, tax on dividends and capital gains tax.

      • You need to bear in mind, though, that tax rules can change in future and that their effects on you will depend on your individual circumstances.

      • Because, since the ISA is not usually in a retirement account, it does not receive default exempt status during the growth phase.

How Much Can I Invest in an ISA?

There are various limitations for investing, and each year a person gets a certain amount they can invest (usually around 20,000 GBP Per year) – and there are limitations as to how many different ISA funds you can contribute to each year.

How is an ISA Taxed in the UK?

The ISA grows tax-free, so even if interest, dividends, or capital gains are accruing within the fund, you are not immediately taxed on the growth phase.

Does the U.S. Tax the Growth on an ISA?

Generally, the answer would be yes. It is an investment, and if income is being generated on the growth of the fund, and/or it is accruing interest, dividends, or capital gain distributions, it would not be exempt from U.S. Tax

ISA Reporting (FBAR, FATCA, PFIC, Foreign Trust)

Beyond the taxation rules for ISAs, there are also “reporting” Rules for ISAs as well.

ISA FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investment funds and certain foreign life insurance policies.  The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

 Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals as follows:.

      • Single or Filing Separate (in the U.S.): $50,000/$75,000

      • Married with a Joint Returns (In the U.S): $100,000/$150,000

      • Single or Filing Separate (Outside the U.S.): $200,000/$300,000

      • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520

Form 3520 is filed when a person receives a Gift, Inheritance, or Trust Distribution from a foreign person, business, or trust. There are three (3) main thresholds:

      • Gift from a Foreign Person: More than $100,000.

      • Gift from a Foreign Business: More than ~$17,000.

      • Foreign Trust: Various threshold requirements involving foreign Trusts

Form 8621

Form 8621 requires a complex analysis, beyond the scope of this article.

The Form 8621 is required to report a PFIC (Passive Foreign Investment Company) — with very limited exceptions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their 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?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and 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.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.