This guide is for US citizens and green-card holders who live in the UK and want to save or invest here. In brief: an ISA is tax-free in the UK but not in the US, and most UK funds are “passive foreign investment companies” (PFICs) under US law, which brings a harsh default tax regime and annual reporting. Mirror-image rules make many US funds costly for UK residents, so the choice of what to hold, and where, matters more for Americans than for anyone else.
Are ISAs tax-free for Americans living in the UK?
No, only for UK tax. An Individual Savings Account is tax-free in the UK[2], but the United States taxes its citizens on worldwide income and does not recognise the wrapper, so every dollar of interest, dividends and realised gains inside an ISA belongs on the US return in the year it arises.
The reason is the treaty. The 2001 US–UK treaty lets the US tax its citizens “as if this Convention had not come into effect”, except for listed provisions[1]. Some pension provisions are among those exceptions, including the rule that a pension scheme’s income is taxed only when paid out, which is why a SIPP’s growth is generally not taxed in the US until then. But the treaty defines a pension scheme as an arrangement “operated principally to administer or provide pension or retirement benefits”[1], and ISAs are not mentioned anywhere in it. An ISA therefore gets no special US treatment.
That creates a mismatch rather than double taxation. The UK charges nothing, so there is no UK tax for the US to credit, and the US charges its full rate. Interest and dividends fall into the “passive” category for foreign tax credit purposes[24]. In some households, surplus credits from other heavily taxed UK investment income in the same category can absorb part of the US tax on ISA income, but that depends on the whole return.
ISAs are also foreign financial accounts. They count towards the $10,000 FBAR threshold, and ISA assets such as foreign funds are reportable on Form 8938 once the thresholds are met[17]. A small minority of practitioners have argued that some ISAs should be reported as foreign trusts; there is no IRS guidance on the point, and most treat a stocks and shares ISA as a custodial investment account. This is one of several areas where you should agree an approach with your US tax preparer.
An ISA is not always a poor choice for an American. The UK tax saving is real, and if the ISA holds investments that are not PFICs, the US treats it much like an ordinary brokerage account. The difficulty arises mainly when the ISA holds UK or other non-US funds.
What is a PFIC, and why are most UK funds PFICs?
A passive foreign investment company is any non-US corporation that either earns 75% or more of its gross income from passive sources, such as dividends, interest and gains, or holds at least half its assets, on average, in assets that produce passive income[3]. An investment fund exists to hold passive assets, so a non-US fund that is treated as a corporation for US purposes is almost always a PFIC.
Most UK and European funds are treated as corporations. Under the US entity classification rules, a non-US entity whose members all have limited liability defaults to being an “association”, taxed as a corporation[4]. In practice that captures most of the funds UK investors use:
- UK open-ended investment companies (OEICs) and most unit trusts;
- UCITS exchange-traded funds listed in London, many of which are domiciled in Ireland or Luxembourg;
- UK investment trusts and other listed closed-ended funds, which are companies whose business is holding investments;
- money market funds and many multi-asset or “ready-made” portfolio funds.
Shares in ordinary trading companies, such as a UK bank, retailer or manufacturer, are not normally PFICs because their income and assets are mainly active. A US-domiciled fund is not a PFIC because it is not foreign. Classification can be technical at the edges; for example, a company holding at least 25% of another company is treated as owning its share of that company’s assets and income[3].
How is a PFIC taxed under the default “excess distribution” regime?
Unless you make an election, section 1291 applies. Any gain on sale, and any distribution more than 125% of the average you received in the previous three years, is an “excess distribution”[5]. It is spread evenly over each day you held the shares. The part allocated to the current year is ordinary income. The parts allocated to earlier years are taxed at the highest ordinary rate that applied in each of those years, whatever your own bracket was, and interest is added as if that tax had been paid late[5].
Three further features make the regime expensive:
- No capital gains rates. A gain that would be a long-term capital gain on a US fund, taxed at 0%, 15% or 20%[12], is taxed as described above instead.
- No qualified dividend rates. Ordinary distributions from a PFIC are not “qualified dividends”[6], so they are taxed at ordinary rates even when they fall within the 125% limit.
- Accumulation funds defer everything to the end. An accumulation share class pays no distributions, so the whole return is taxed as a single excess distribution on sale, with interest running across the full holding period.
The current US interest rate on individual underpayments is 7%, compounded daily[11]; the rate changes quarterly. The top ordinary rate for 2026 is 37%[12].
What are the QEF and mark-to-market elections?
Two elections replace the default regime, but each has conditions that many UK funds do not meet. A qualified electing fund (QEF) election needs the fund to supply an annual statement; a mark-to-market election needs the shares to be “marketable”.
| Feature | Default (section 1291) | QEF election (section 1295) | Mark-to-market (section 1296) |
|---|---|---|---|
| What is taxed each year | Nothing until an excess distribution or sale, apart from ordinary distributions | Your share of the fund’s ordinary earnings and net capital gain, whether distributed or not[9] | Any rise in value over the year[7] |
| Character | Ordinary income; prior-year parts at the top rate plus interest[5] | Ordinary income and long-term capital gain, keeping the fund’s character | Ordinary income[7] |
| Losses | Loss on sale generally a capital loss | Capital loss on sale | Deductible only up to earlier net inclusions[7] |
| Condition | None | Fund provides a PFIC Annual Information Statement[9] | Shares regularly traded on a regulated exchange, or a qualifying fund[8] |
| Practical availability for UK funds | Always applies by default | Uncommon; relatively few UK funds publish the statement | Often possible for listed ETFs and many regulated open-ended funds |
The mark-to-market route is the one most often available. Shares regularly traded on a foreign exchange regulated by a government authority can qualify[9], and so can a non-exchange-traded fund that, among other conditions, has more than 100 shareholders, is available to the public at net asset value with a minimum investment of no more than $10,000, publishes prices at least weekly, has audited accounts and is regulated as an investment company[8]. The cost is that every year’s growth is taxed at ordinary rates, with no capital gains rate and no deferral.
If a fund has already been held under the default regime, starting a QEF election later can require a “purging” election that treats the shares as sold at market value, with the gain taxed under section 1291[9]. Timing matters, and elections are generally made on a timely filed return.
When does an American need to file Form 8621?
Generally every year, for each PFIC held directly or indirectly, and also in any year you receive a distribution, sell shares or make an election[9]. There is a limited exception from the annual report: if the total value of all your PFIC shares is $25,000 or less at the end of the year ($50,000 or less on a joint return), and you received no excess distribution and recognised no gain, Part I of the form need not be completed; a $5,000 test applies to some indirect holdings[9].
PFICs held through a pension that a treaty treats as a foreign pension fund are also excepted from the annual report in certain cases[9]. For Americans in the UK that generally means funds inside a registered UK pension such as a SIPP, whose income the treaty does not tax until it is paid out[1]. The ISA does not qualify.
Missing the form has a consequence beyond any penalty. The IRS’s time limit for assessing tax on items connected to a required PFIC report does not start to run until three years after the information is supplied[10], so an unfiled Form 8621 can leave those items open indefinitely.
Worked example: a UK fund in an ISA under the default PFIC rules (illustrative arithmetic)
Fictional investor, for illustration only; this is our own simplified arithmetic, not a calculation from Edale’s planner. A US citizen resident in the UK puts the equivalent of $50,000 into an accumulation share class of a UK-domiciled index fund inside a Stocks and Shares ISA and sells it after exactly five years for $80,000, a $30,000 gain. No election was made and there were no distributions. We assume the investor is in the 24% US bracket in the year of sale, that the top rate was 37% in each earlier year, and that the IRS interest rate was 7% throughout; actual rates change quarterly. We ignore net investment income tax, state tax and currency movements. Results are not a prediction of any real tax bill.
| Item | Amount |
|---|---|
| Gain allocated to each year (about $30,000 ÷ 5) | $6,000 |
| Year of sale: $6,000 at 24% | $1,440 |
| Four earlier years: 4 × $6,000 at 37% | $8,880 |
| Interest on the earlier years’ tax at 7%, compounded daily | about $1,730 |
| Total US tax under the default regime | about $12,050 (about 40% of the gain) |
| UK tax (inside an ISA) and foreign tax credit available | £0 and $0 |
| For comparison: same gain taxed as a long-term capital gain at 15% | $4,500 |
| For comparison: mark-to-market from the start, assuming 24% in every year (paid year by year) | about $7,200 in total |
Most of the cost comes from the rule that taxes earlier years at the top rate, whatever the investor’s own bracket was, rather than from the interest. The longer the holding and the larger the gain, the more the result diverges from capital gains treatment. The UK wrapper does not help: the ISA removes UK tax, so there is nothing to credit, and the whole US charge is an extra cost compared with a non-American holding the same fund. Real calculations allocate by day, use each year’s actual top rate and interest rates, and can involve foreign tax credit and currency questions. Treat this as an illustration of scale only.
Can Americans in the UK simply hold US funds instead?
Sometimes, but the UK has its own version of the problem. A US-domiciled fund is an “offshore fund” for UK tax, and when a UK resident sells an offshore fund that does not have HMRC reporting fund status, the gain is an “offshore income gain” taxed as income rather than as a capital gain[13].
The difference is significant. For 2026/27 capital gains tax is 18% or 24%[16], while a higher-rate taxpayer pays 40% income tax, and 45% above £125,140[15]. With reporting fund status, gains fall under capital gains tax, and any income the fund reports but does not pay out (“excess reportable income”) is treated as received six months after the end of the fund’s reporting period and must be declared[13].
HMRC publishes a list of approved reporting funds, identified by ISIN and updated monthly[14]. Some US-domiciled ETFs and funds hold reporting status and many do not, and status can change, so it needs checking for each share class and each year. Income and gains from funds held inside an ISA do not need to be declared on the UK return[13], and investments inside a registered pension are not taxed on the member as they arise.
Access is a separate question. UK retail platforms have often not offered US-domiciled ETFs because of UK product-disclosure rules, and some UK and US providers restrict accounts for Americans resident abroad. The FCA’s new Consumer Composite Investments regime began on 6 April 2026, with full implementation from 8 June 2027[23]; its effect on the range available to UK retail investors remains to be seen. Availability varies by provider.
What investment choices work for Americans in both systems?
There is no single right answer, but the options fall into a small number of patterns, each with trade-offs. Which suits you depends on your circumstances, the size of the portfolio, how long you expect to stay in the UK and the costs involved, and you should take advice before acting.
| Holding | US treatment | UK treatment | Points to weigh |
|---|---|---|---|
| UK or Irish funds and ETFs in an ISA | PFIC; taxable; Form 8621 | Tax-free | Usually the least efficient combination |
| UK or Irish funds and ETFs in a general account | PFIC; Form 8621 | Income tax on distributions; CGT on gains (non-UK funds need reporting status) | Mark-to-market may reduce the damage; UK tax may be creditable |
| Individual shares (UK or US) in an ISA | Taxable as normal; capital gains and qualified dividend rates may apply | Tax-free | No PFIC issue; concentration and diversification risk |
| Individual shares in a general account | Taxable as normal | Dividend tax and CGT | UK tax generally creditable against US tax |
| US-domiciled funds with UK reporting status, general account | Ordinary US fund taxation | CGT on gains; reportable income taxed | Avoids both problems where available; check the HMRC list |
| US-domiciled funds without reporting status | Ordinary US fund taxation | Gains taxed as income | UK income tax on gains |
| Funds inside a SIPP or workplace pension | Generally not taxed until paid out under the treaty; annual Form 8621 exception may apply | Tax-relieved pension | Access rules and US treatment of withdrawals; see our pensions guide |
| US IRA, 401(k) or Roth IRA | Tax-deferred or tax-free under US rules | Treaty treatment applies | See our guide to US retirement accounts |
Three practical observations follow. First, the pension wrapper is the one UK account where PFIC holdings are generally workable, because the treaty defers US tax until money is paid out; see UK pensions for US persons. Second, where an ISA is used, the holdings matter more than the wrapper. Third, existing PFIC holdings raise their own question: selling triggers the default tax, but keeping them lets the interest charge grow. Modelling both routes before deciding is sensible. Our guide to investing across US and UK markets covers asset location in more depth, and US retirement accounts when you live in the UK covers IRAs and 401(k)s.
How are cash ISAs, Premium Bonds and Lifetime ISAs treated?
Cash ISA interest and Premium Bond prizes are free of UK tax but taxable in the US, and neither raises a PFIC issue. Lifetime ISAs add a government bonus whose US treatment is less settled.
Cash ISAs. Interest is ordinary income on the US return, with no UK tax to credit. For 2026/27 the full £20,000 allowance can go into cash[2]; from April 2027 savers under 65 will be limited to £12,000 in cash ISAs within the £20,000 total, while those over 65 keep the full amount[18]. For an American, a cash ISA mainly saves UK tax on interest, and is simplest to report when the account is in one currency and income is modest.
Premium Bonds. NS&I describes all prizes as free of UK income tax and capital gains tax, and holdings are capped at £50,000[19]. US law includes prizes and awards in gross income[20], so prizes belong on the US return, and holdings count for FBAR and Form 8938 purposes where the thresholds are met. The published prize fund rate is an average; an individual holder may win more or less, or nothing.
Lifetime ISAs. You can pay in up to £4,000 a year until age 50, must open the account before 40, and receive a 25% government bonus of up to £1,000 a year; contributions count towards the £20,000 limit[21]. The US has no specific guidance on the bonus. Many practitioners report it as income when received, and investment growth is taxed in the US in the usual way. A 25% withdrawal charge applies except for a qualifying first-home purchase, from age 60, on terminal illness or on death[25].
Junior ISAs. The 2026/27 limit is £9,000 per child[22]. If the child is a US citizen, the account is the child’s for US purposes, and the same PFIC and reporting points apply.
How the Edale Wealth Hub helps
PFIC problems are usually found late, when a return is being prepared or a holding is sold. The Edale Wealth Hub is designed to bring them into view earlier, when there are still choices to make.
- PFIC identification in planning. Edale’s planner identifies non-US funds held by US persons that are likely to be PFICs, so an adviser can see which holdings, in which accounts and belonging to which family member, need attention.
- Both tax systems, one plan. The planner models ISAs, general accounts, SIPPs and investment bonds alongside US brokerage accounts, IRAs and Roth IRAs, and calculates UK and US tax together for US persons, including foreign tax credits and the net investment income tax. That makes it possible to compare, for example, drawing from an ISA with drawing from a pension or a US account.
- PFIC flags in the portal. For accounts linked by the adviser (currently Interactive Brokers UK and US), My Investments produces a US tax summary in 1099-style categories. It is a summary, not a Form 1099, and it flags PFIC holdings, maps dividends and interest to the relevant categories, shows foreign tax withheld and provides Form 8949 detail with a CSV export.
- Both currencies. Gains, dividends and interest are shown year to date in pounds and dollars, converted at each transaction’s date. Sterling gains are a guide only, because UK capital gains tax uses share-matching and pooling rules.
- ISA tracking. Clients can see how much of the £20,000 ISA allowance and each child’s £9,000 Junior ISA allowance has been used.
The limits are important. The Wealth Hub does not prepare Form 8621 or make PFIC elections; those are matters for your US tax preparer, who can use the summaries as a starting point. PFIC flags are an aid to identification, not a legal determination, and My Investments covers linked Interactive Brokers accounts only. Edale does not prepare US tax returns and is not a US-registered investment adviser. To discuss how these rules affect your own accounts, you can arrange a conversation, read about Edale’s planner, or start with our complete guide to US–UK wealth planning and how both tax systems apply to Americans in the UK.
Frequently asked questions
Can a US citizen open an ISA?
Yes, if they are a UK-resident adult, since UK rules do not depend on citizenship. Some providers decline US persons for their own reasons. The ISA is tax-free in the UK only: the US taxes its interest, dividends and gains each year, and UK funds held inside it are usually PFICs. Whether one suits you depends on what it holds and your wider circumstances.
Is a UK index fund a PFIC?
Almost always, if you are a US person. A UK OEIC, unit trust or London-listed UCITS ETF is normally treated as a foreign corporation for US tax, and because its income and assets are passive it meets the PFIC tests. The same applies to Irish and Luxembourg funds and to investment trusts. Shares in ordinary trading companies are generally not PFICs.
What happens if I have held UK funds for years without filing Form 8621?
The default excess distribution regime applies, and the IRS’s time to assess tax on related items stays open until three years after the missing information is provided. Some holdings may fall under the $25,000 or $50,000 exception for the annual report. Bringing filings up to date is a matter for a US tax professional, who can advise on the available procedures.
Is the mark-to-market election better than the default PFIC rules?
Often, for funds that qualify, because it avoids the top-rate allocation and interest charge. The price is that each year’s increase in value is taxed as ordinary income, even if you sell nothing, and losses are only deductible up to earlier gains taxed under the election. Whether it helps depends on the fund, your tax rates and how long you hold.
Are US ETFs a problem for UK tax?
They can be. A US-domiciled ETF is an offshore fund for UK purposes, and if it lacks HMRC reporting fund status, gains on sale are taxed as income, at up to 45%, rather than at capital gains rates of 18% or 24%. HMRC publishes a monthly list of reporting funds by ISIN. Inside an ISA or a pension the point does not arise for UK tax.
Are Premium Bond prizes taxable for Americans?
In the US, yes. NS&I prizes are free of UK income tax and capital gains tax, but US law includes prizes in gross income, so they belong on the US return with no UK tax to credit. Holdings can also count towards the FBAR and Form 8938 thresholds. The prize fund rate is an average, and individual results vary.
Do PFIC rules apply to funds inside my SIPP?
Generally the PFIC tax rules do not bite while funds stay inside a registered UK pension, because the US–UK treaty defers US tax on pension scheme income until it is paid out. The Form 8621 instructions also except certain treaty-recognised pension holdings from the annual report. US tax then applies to withdrawals under the treaty’s pension rules.
Sources
- GOV.UK — 2001 UK–USA Double Taxation Convention as amended by the 2002 protocol (accessed September 2026)
- GOV.UK — Individual Savings Accounts (ISAs) (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 1297, Passive foreign investment company (accessed September 2026)
- Legal Information Institute — 26 CFR § 301.7701-3, Classification of certain business entities (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 1291, Interest on tax deferral (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 1, Tax imposed (qualified dividend income, § 1(h)(11)) (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 1296, Election of mark to market for marketable stock (accessed September 2026)
- Legal Information Institute — 26 CFR § 1.1296-2, Definition of marketable stock (accessed September 2026)
- IRS — Instructions for Form 8621 (December 2025) (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 6501, Limitations on assessment and collection (accessed September 2026)
- IRS — Interest rates remain the same for the fourth quarter of 2026 (accessed September 2026)
- IRS — Revenue Procedure 2025-32 (2026 inflation adjustments) (accessed September 2026)
- HMRC — HS265 Offshore funds (accessed September 2026)
- HMRC — Approved offshore reporting funds (accessed September 2026)
- GOV.UK — Income Tax rates and allowances for current and previous tax years (accessed September 2026)
- GOV.UK — Capital Gains Tax rates (accessed September 2026)
- IRS — Comparison of Form 8938 and FBAR requirements (accessed September 2026)
- HM Treasury and HMRC — Budget 2025: Overview of tax legislation and rates (accessed September 2026)
- NS&I — Boost for Premium Bonds (press release, 18 August 2026) (accessed September 2026)
- Legal Information Institute — 26 U.S. Code § 74, Prizes and awards (accessed September 2026)
- GOV.UK — Lifetime ISA (accessed September 2026)
- GOV.UK — Junior Individual Savings Accounts (accessed September 2026)
- Financial Conduct Authority — PS25/20: Final rules for Consumer Composite Investments (accessed September 2026)
- IRS — Publication 514, Foreign Tax Credit for Individuals (accessed September 2026)
- GOV.UK — Lifetime ISA: withdrawing money (accessed September 2026)