dunroving

There have been one or two threads lately on the tax status of endowment payouts, pension lump sums, Roth IRA pension payouts, etc., when living in the "other country" (i.e., living in the US when endowments mature or pension lump sums are paid, or living in the UK and receiving Roth IRA payouts).

Some of these (e.g., Roth) seem to be clearly covered by UK/US tax treaties. Does anyone know how ISA's are treated if you are living in the US? If you cash in a stocks/shares unit trust type ISA when living in the US, is it considered tax-free under UK/US tax treaties?

SamuearlJackson

Well, I just spent about 1.25 hours on the phone with the IRS getting the run around on this issue. The final person I spoke to said that if the closest definition of the UK account was as a "Roth IRA" then it would be treated for tax purposes like that. I explained that an ISA is not a retirement account but does have a tax advantaged status (like a Roth does).

Seems like an area of tax law that most of the IRS representatives are not sure about. Thus, I am still not sure what the correct way to deal with this is...

The question regarding cashing in stocks & shares is likely more complex than dealing with simple interest on a cash ISA, but I could not get a straight answer regarding the latter even.

im9907620

It's frustrating when they don't understand the UK version of things but it works two ways of course.

Bascially, if a pension lump sum is not taxable in the US or the UK then it is not taxable by the other state. You have to declare it on your US tax return but get your CPA to refer to the treaty. It's what you do with it after that really counts - tax on savings interest, or investment returns will prevail.

As for ISAs (or PEPs) then that could be bad news. The IRS ignore the tax wrapper and class a stocks/shares or unit trust ISA as ordinary stocks/shares or mutuals (the US version).

They will use an historic cost basis so that any profit will be based upon the the purchase price (or prices). Depending on the exchange rate then and now you could also suffer a lower purchase price (or vice versa).

Sadly, it does not end there because as they are classed under PFIC rules (Passive Foreign Investment Companies) then any gains are divided out and applied to each year that you have held your ISA. It doesn't stop there - as they apply an interest charge for each year that you have held it too, so ultimately, for an ISA/share that has been held long term, you could end up suffering a tax charge of up to 80-100%. For immigrants to the US it is usually advisable to sell these kind of things before going to the US. Placing funds in a deferred variable annuity (a sort of offshore investment bond) can protect against US taxes whilst one is there, and particularly so if one is returning to the UK ultimately.

Of course, if the IRS doesn't know about your ISAs in the first place, then it might not be too late to take action!

not intended as advice, just friendly help

dunroving

Bloody hell, clear as mud, like most tax issues. Thanks for the detailed explanation, very frustrating that tax folks can't say "if it's not taxable over there, we won't tax it here either". I mean THAT'S what I would call a tax treaty. It's inane regulations like that that lead honest folks towards tax evasion. I have an endowment maturing in 2013 and it p*sses me off that if I'm living in the UK it wouldn't be taxed, but if I'm living in the US, it would. As if it's not enough that I'll get shafted by the endowment company via the serious shortfall I'm looking at. :curse:

So, if I were to head back to the States (as is the plan), is there an "investment vehicle" you'd recommend that would avoid taxes regardless of whether I retire in the US or UK? (I wasn't actually thinking of the ISAs as being something for retirement. Men in my family don't typically reach retirement age so I always keep in mind that I might want to spend some of my investments before retirement age ).

I can't believe the bit I have put in bold.

im9907620

Yep, clear as mud!

Generally, nothing is tax-free unless you retire to a tax haven (ever thought about Panama or Cyprus!? )

As for income, the best you can hope for is that your income will fall in the lower tax rates and/or within your annual allowance either in UK or US. If you stayed in the UK however your ISA income would be tax-free...but most folk don't have big ISA pots to make this of any significance. Arguably, you could drawdow on your ISAs in the UK (if you have not declared them to the IRS )and send them across to the US as long as the payments were under ther radar at $10,000 or less. Then bank them as capital.

Too complicated to answer here but it ultimately depends on each individual's situation and how much one's assets and income are likely to be. Unlucky on the endowment - tried selling it? or thought about cashing it and putting it in your pension - at least you'd make 20% overnight in tax relief. Might make up some of the shortfall?

not intended as advice, just friendly help

Ludo1979

Found this forum as a result of searching for answers on this exact question.

Ive been in the US now for 4 years and have always paid tax on my ISA, since the 'experts' at Deloitte and Touche determined that it was taxable. However Deloitte will naturally air on the side of caution when they don't know the answer as they are putting their name on the tax return.

Like everyone else I have exhausted all avenues to get clarification on whether the tax free part of the ISA is honoured by the IRS. Having tried to read the tax treaty document, no wonder nobody understands, its just full of legal bollocks.

So my question....should I not declare it this year based on it being a savings scheme that is tax free as provided by the UK government, and claim that this is covered in the tax treaty? Honestly which IRS auditor is going to know the details of the tax treaty.... at best the rules are grey, so in the worst case I could claim an honest mistake! .... right??

Help me people...! PLease!

im9907620

Deloittes are correct as is the thread above. ISA funds - essentially just unit trusts - are not recognised in the US and are classed as Passive Foreign Investment Companies (not good!). The interest/income and capital gains are taxable. The tax treaty does not apply. Not sure whether you have cashed any in, but if you haven't then don't if you can help it. Any gains are taxable from inception on full or part surrender plus interest on the gain too for the number of years you've held it. Tax is payable at your highest marginal rate in the time you've had them - fairly punitive eh! If they haven't made much profit that is probably good. If you are returing to the UK then try not cash them before then. If you are staying in the US, then you should think about the tax cost of cashing them and starting afresh.

general advice only and not to be construed or taken as professional advice

dunroving

OK, so back to my earlier question - does anyone know of a tax-free UK investment vehicle that an ISA could be 'rolled over" into in the UK, so it will also be tax-free in the US? How about a UK personal pension?
As I also said before, men in my family don't tend to last very long, but I'm presuming a private personal (U.K.) pension can be drawn on from age 60 ...? (Can you tell I'm a complete numpty when it comes to finances?)

im9907620

The answer sadly is no, though you can take a UK personal pension from age 55 (from 2010) and not 60. The tax free lump sum will be tax free in both countries under the tax treaty but the pension will be taxed in your country of residence. It really depends how much you can 'roll over' and where you'll be resident in the future. Send me an e-mail if you want to let me have your details and further info. You wouldn't hang your washing in public would you?....hhmmm.....or would you?

general advice only and not to be construed or taken as professional advice

Ludo1979

Thanks for the feedback.... It sounds like Im damned if I do and damned if I dont! Its not like Im paying a fortune in tax but its an extra $400 I have to pay, and at this point in life (29) its a bit of a struggle. Does the fact that I am paying tax on the dividends now mean that I will pay less when I eventually decide to cash it in???

Unless I have a significant career change it is unlikely that I will be moving back to the UK any time soon, so at some point I will have to do something with it. Anybody now if it is possible to transfer an ISA to someone else???

Once again thanks for the advice...

im9907620

You will be taxed on the dividends but also any growth from their commencement - only you will know how much profit you have made (if any). The longer they run, the more the potential for profit and the more US tax you will pay, at your highest marginal rate during the period of ownership - figure that one out yourself!

If you are figuring on staying stateside then while the stockmarket is low you might want to explore the possibility of cashing them in and transferring the proceeds over, and maybe into an IRA or Roth IRA. Your Accountant needs to work the figures first to see what the tax cost of surrender will be.

I note you have been out of the UK for 4 years. Once you have been out of the UK for 5 FULL tax years then you could transfer any old UK pensions to an offshore pension scheme (QROPS). Just a thought, that if you waited until then you could transfer the ISA money into that scheme.

But isn't this information what you are paying Deloittes for??

general advice only and not to be construed or taken as professional advice