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Share ISA / PFIC - long term hold

Share ISA / PFIC - long term hold

Old Jan 21st 2016, 4:56 am
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Default Share ISA / PFIC - long term hold

This is a question for anyone that has continued to hold UK ISAs after becoming UK tax resident or has experience in that area...

In short - anyone got suggestions for UK ISA investments for US Resident alien (EB1) to avoid PFIC but reduce the risk of single stock holdings.

Background - I have many years ISAs built up in a shares ISA account and for that reason did not close this out 2 yrs ago on move over to USA, despite some suggestions to that effect. We may move back on a 5-7 yr time frame and replacing /recreating the longer term tax saving wrapper / retirement benefits on this sum would be difficult. What has been successful in reducing complexity in the short term was moving to Hargreaves Lansdown who allow US resident holders (from TD Waterhouse who didnt) before leaving and converting all holdings to cash to avoid capital gains before departure / in the right tax year. HL also allow cash holdings in a share account. Still, this is obvs not a good long term strategy, and I had been waiting for a better time to be re-investing, as we are starting to see now...

I understand PFIC rules mean UK (mutual/unit) funds would be a no-no, and the usual advice is single stock holdings. Would ETFs count as unit trusts or is that a possibility? Are Vanguard an option, even though the Vanguard Uk funds are registered in UK? What else?....

Any ideas for me to research...my intention would be long term hold, minimise the dividends to avoid US cap gains and not trade wherever possible to avoid cap gains. I'm aware FBar. Thanks for your thoughts/input!
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Old Jan 21st 2016, 8:45 am
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Default Re: Share ISA / PFIC - long term hold

I understand the problem. Single stock holdings, even large caps have risk: banks, oil, ... Corporate actions can result in an unexpected tax bill.

One option is UK Gilts. The yield is only about 1 or 2 percent but it keeps the ISA open until your return. Gilts with a maturity date after your expected return and a small coupon will help to keep income tax reasonable.

The portfolio can be balanced with other investments in a pension or in the US.
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Old Jan 21st 2016, 12:24 pm
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Default Re: Share ISA / PFIC - long term hold

Be careful, "cash" inside a stocks and shares ISA won't necessarily avoid PFIC issues. You need to know exactly the type of account.....a money market account would be PFIC, a simple saving account would not.

So to avoid PFIC you would have to have a simple saving or cash account.

Individual stocks and bonds are OK as are US registered mutual funds or ETFs. If you get into things like Gilts you must buy the individual Government bonds and NOT a UK Gilt fund. US Vanguard is an option, but UK Vanguard is NOT.

Finally you need to look at the structures of funds see what is equivalent in the US and the UK. Both countries call ETFs, ETFs. A UK unit trust is basically analagous to a US open ended mutual fund.
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Old Jan 21st 2016, 9:17 pm
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Default Re: Share ISA / PFIC - long term hold

I'll look at Gilts, but I dubious about Hargreaves Lansdown offering individual govt bonds, but maybe.

I have looked at HL funds that are US Registered with UK/HMRC reporting, and there are some, but the fact sheets on HL say not available in a Vantage ISA. Argh! I have sent a request for a list of tradable funds that are US registered.

It might be that I have to pick some UK blue chips, but that is not my preference as that will require headspace and management.

I could consider closing it, but another factor against this is the terrible exchange rate. So hard!
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Old Jan 22nd 2016, 2:43 am
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by Mcodox View Post
I'll look at Gilts, but I dubious about Hargreaves Lansdown offering individual govt bonds, but maybe.

I have looked at HL funds that are US Registered with UK/HMRC reporting, and there are some, but the fact sheets on HL say not available in a Vantage ISA. Argh! I have sent a request for a list of tradable funds that are US registered.

It might be that I have to pick some UK blue chips, but that is not my preference as that will require headspace and management.

I could consider closing it, but another factor against this is the terrible exchange rate. So hard!
If you can buy US registered ETFs or mutual funds inside the ISA the issue of UK reporting fund status is moot because the ISA is UK tax free.
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Old Jan 22nd 2016, 5:24 pm
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by nun View Post
If you can buy US registered ETFs or mutual funds inside the ISA the issue of UK reporting fund status is moot because the ISA is UK tax free.
Response from Hargreaves for others future info is that they do not allow customers to buy their US registered funds or ETFs with an ISA wrapper...so that seems to knacker that idea as well.

Unless I can find index based alternatives or the response was wrong, that probably means i need to find individual shares I am happy to hold. And given the capital gains and income taxation on UK ISAs I would need to find UK shares that I preferably wouldnt sell within a 1 yr period to avoid short term US cap gains rates, and also low dividend paying shares to avoid the tax on income in the ISA. Not ideal, most shares I would be happy to hold long term are usually 'income' stocks / higher yielding. eg GSK, Unilever, P&G etc. Might have to go back to my smaller company trading days...

Or maybe there is another approach/scenario. Any ideas??

fyi - here is one advisors analysis of if an ISA constitutes a PFIC
HodgenLaw PC - International Tax
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Old Jan 22nd 2016, 6:30 pm
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by Mcodox View Post
fyi - here is one advisors analysis of if an ISA constitutes a PFIC
HodgenLaw PC - International Tax
Interesting.

I felt like adding at the end, "And that's why such things are called 'wrappers', because what matters is what's on the inside, not what it's called on the outside."
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Old Oct 28th 2016, 7:39 am
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Default Re: Share ISA / PFIC - long term hold

What did you decide in the end Mcodox? Facing a similar decision and my research is not finding many suitable options.
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Old Oct 28th 2016, 4:31 pm
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Default Re: Share ISA / PFIC - long term hold

Unfortunately I ran into so many different walls with this that i didn't find a solution before I moved on with life, and left the isa as cash.

Still occasionally trying to figure out a simple answer but not much inclined to invest in single stock uk shares at this point. Don't want to convert to a US investment now either with rates. No idea how long will be in USA which adds complexity. Would be good to hear if you find any other suggestions...
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Old Nov 4th 2016, 10:09 am
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Default Re: Share ISA / PFIC - long term hold

Sounds like we are in quite a similar position. I think I will end up just selling the holdings and moving it over to the best cash isa I can find. Other options I've considered are:

* move to innovative finance ISA - allows P2P loans for greater risk and potential higher returns but no big players (Zopa/RateSetter/etc) have their ISA available yet
* single stocks - the transaction costs would be too high and the amount too low to build up a suitably diversified portfolio I think
* continue to hold funds with addition reporting in the US - I do not anticipate selling anytime soon so this could be an option but it increases complexity and I would prefer something simple
* buy some corporate bonds (direct, not a fund) - still considering this one but wary as it's not an investment I would consider under normal circumstances
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Old Nov 4th 2016, 11:47 am
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by mwc View Post
Sounds like we are in quite a similar position. I think I will end up just selling the holdings and moving it over to the best cash isa I can find. Other options I've considered are:
This is ok, you would just pau US tax on the interest and have FBAR etc filing.

* move to innovative finance ISA - allows P2P loans for greater risk and potential higher returns but no big players (Zopa/RateSetter/etc) have their ISA available yet
These could well be PFIC so either get advice or avoid them

* single stocks - the transaction costs would be too high and the amount too low to build up a suitably diversified portfolio I think
ok
* continue to hold funds with addition reporting in the US - I do not anticipate selling anytime soon so this could be an option but it increases complexity and I would prefer something simple
Not only additional reporting but also additional PFIC tax.

* buy some corporate bonds (direct, not a fund) - still considering this one but wary as it's not an investment I would consider under normal circumstances
This is similar to buying individual stocks.....but they should be less risky
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Old Nov 4th 2016, 12:07 pm
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by mwc View Post
Sounds like we are in quite a similar position. I think I will end up just selling the holdings and moving it over to the best cash isa I can find. Other options I've considered are:

* move to innovative finance ISA - allows P2P loans for greater risk and potential higher returns but no big players (Zopa/RateSetter/etc) have their ISA available yet
* single stocks - the transaction costs would be too high and the amount too low to build up a suitably diversified portfolio I think
* continue to hold funds with addition reporting in the US - I do not anticipate selling anytime soon so this could be an option but it increases complexity and I would prefer something simple
* buy some corporate bonds (direct, not a fund) - still considering this one but wary as it's not an investment I would consider under normal circumstances
If you are still in the UK I think (someone will correct me if I am wrong) you could place up to 40k GBP in a SIPP and you would have tax relief added. You would then have freedom of investment within the SIPP wrapper. This would depend on what pension contributions you have already made this year, how much you have earned this year and whether you want to tie up the funds long term. I know that Hargreaves Lansdown & AJ Bell permit accounts to be held by US residents.
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Old Jan 4th 2017, 8:54 pm
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Default Re: Share ISA / PFIC - long term hold

Hi all,

I hope you don't mind if I dig up this recent thread - I am in the same boat. I will achieve "resident alien" status in the summer, and have S&S ISAs (units trusts and so on) that I really don't want to have to mess around with.

So, could someone please clarify:

Under PFIC rules, are S&S funds (unit trusts etc) taxed annually, regardless of whether any profit is realised (through sale of funds or paid dividends)? That is, if I only stay another two years, for example, retain the funds without realising any gains, and then leave the U.S., are they still going to be a massive headache and get penalised while I'm here?

Any advice much appreciated.
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Old Jan 5th 2017, 12:02 am
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Default Re: Share ISA / PFIC - long term hold

Originally Posted by benwt View Post
Hi all,

I hope you don't mind if I dig up this recent thread - I am in the same boat. I will achieve "resident alien" status in the summer, and have S&S ISAs (units trusts and so on) that I really don't want to have to mess around with.

So, could someone please clarify:

Under PFIC rules, are S&S funds (unit trusts etc) taxed annually, regardless of whether any profit is realised (through sale of funds or paid dividends)? That is, if I only stay another two years, for example, retain the funds without realising any gains, and then leave the U.S., are they still going to be a massive headache and get penalised while I'm here?

Any advice much appreciated.
Yes they will be a pain and yes they will be taxed. Many people mark to market PFIC funds each year ie they treat the funds as if they had sold them and pay tax on all dividends and capital gains...
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Old Jan 5th 2017, 3:41 am
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Default Re: Share ISA / PFIC - long term

Thank you. I see. Great /s

Trying to remain constructive and on topic: I am only likely to stay a couple more years (I'm only on a J-1 visa with no real commitments), maybe only one.

Are there some options that might be tolerable for a short amount of time?

I don't want to quit my job, which I enjoy, but I don't know if I can handle hours and hours of researching, re-organising and stress for the sake of a year or two. I only have about four years equivalent ISA allowance in S&S but its a shame to loose it. And having a pile of cash lying around devaluing is like throwing (quite a lot of) money away based on current market performance...
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