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Will my ISA be taxed?

Will my ISA be taxed?

Old Apr 7th 2018, 5:35 pm
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Default Will my ISA be taxed?

Stocks and shares ISA

Do I declare it exists?

If I don't take money out is it free from tax?
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Old Apr 7th 2018, 6:19 pm
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Default Re: Will my ISA be taxed?

S&S ISA?

Yes, you'll pay tax every year it increases in value both on paper and when taking funds out, but the tax needn't be the most costly aspect. The fees to a competent CPA to properly prepare the rather complicated Passive Foreign Investment Company forms to reduce tax due to time of removing funds may far exceed any tax owed.

Last edited by theOAP; Apr 7th 2018 at 6:35 pm.
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Old Apr 7th 2018, 7:25 pm
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Default Re: Will my ISA be taxed?

Originally Posted by Whoatemycheese View Post
Stocks and shares ISA

Do I declare it exists?

If I don't take money out is it free from tax?

Since you are equalised or protected, are you certain you owe a penny in US tax on personal income; or is this non-equalised or protected? What does your employer's policy say you will owe?
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Old Apr 7th 2018, 7:28 pm
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Default Re: Will my ISA be taxed?

I'm only equalised on salary and benefits, not on income outside my employer, that said, I thought there was no tax if you didn't take from the ISA during the tax year.
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Old Apr 7th 2018, 8:24 pm
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Default Re: Will my ISA be taxed?

Originally Posted by Whoatemycheese View Post
I thought there was no tax if you didn't take from the ISA during the tax year.
If it is a cash only ISA, the amount of interest received during the year is included on the yearly US tax form as income. Schedule B must also be filed to declare a foreign account on the tax return. An FBAR and 8938 may also be required.

If it is a Stocks and shares ISA, the yearly reporting is much more difficult.
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Old Apr 7th 2018, 8:32 pm
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Default Re: Will my ISA be taxed?

Yes it's stocks and shares, there's no income as I don't draw from it, hopefully there will be some appreciation.

It seems odd to get taxed on an asset you haven't crystallised, it might just as well go down the next year.
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Old Apr 7th 2018, 8:45 pm
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Default Re: Will my ISA be taxed?

Originally Posted by Whoatemycheese View Post
Yes it's stocks and shares, there's no income as I don't draw from it, hopefully there will be some appreciation.

It seems odd to get taxed on an asset you haven't crystallised, it might just as well go down the next year.
If it goes down, you still have to report it, but you don't get any credit for the loss. The US discourages the individual from holding any assets outside the US, especially those related to pooled (mutual) stocks and shares, foreign mortgages, or ownership of a foreign business.

Last edited by theOAP; Apr 7th 2018 at 8:54 pm.
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Old May 15th 2018, 9:03 am
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Default Re: Will my ISA be taxed?

I thought there were three ways to deal with a PFIC distributions (or total sales): QEF, Mark to Market (MtM) and 1291 the delayed, tax heavy way. Hodgenlaw has a number of articles on PFICs: (can't post a link yet - look for 'how to report gain on a pfic' or a more amusing one is 'can I give away my PFIC' - PFIC ownership is really that bad). With the 1291 way and when there are no distributions, I though reporting was fairly light weight - working that out takes days though ... As TheOAP mentioned in some posts, if you can get an accountant to help, you'll be glad.

The pain of PFICs: Foolishly, I got a S&S ISA back in the late 90s (less than 3k) when first living here. I learned about PFICs and S&S ISAs in 2011 when the share value was down enough that I could have sold the PFIC for a loss without any tax headache. I'm planning to sell it this year and it's now worth about twice as much as originally (great or so you think). Since I didn't do QEF or MtM, I get to apportion the growth (all since 2012) evenly across the last 20 years, pay tax at the maximum rate (even if I didn't earn enough) per year, AND pay compounded interest on that tax for the last 20 years! That wipes out nearly all of the growth. If I hold on to it much longer, it will start to eat into the original capital.
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Old May 21st 2018, 10:13 pm
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Default Re: Will my ISA be taxed?

We've had this thread many times before - so many times with so many different answers and opinions that I got hold of the IRS and over a two-year odyssey got the information from them and it was no easy task to put it mildly.

An ISA is a tax benefit only to someone resident in the UK, so effectively it is only free from UK tax.

In the US it can be taxed in one of three main ways:

A cash ISA is effectively treated the same as a savings account, so it must be reported on the FBAR (if enough money in it), 8938 and 1040 schedule B;

An ISA that holds stocks, bonds, etc. is a PFIC for US tax purposes and must be reported on Form 8621 using the "mark-to-market" method;

A managed ISA (i.e. someone at the UKFI manages it for you) is considered to be a foreign trust and must be reported on Forms 3520 and 3520-A.

And it can be all three of these - you can start off with cash, invest in stocks and then get someone to manage it for you, in which case you have to use all three reporting methods, pro-rate accordingly and include a letter of explanation.

For this and many other reasons, there is no point to having an ISA if you are a US person for tax purposes. The only reason would be if you were in the US briefly and are not a US citizen or LPR. Even if you're a US citizen who lives abroad it's a massive pain in the backside.
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Old May 21st 2018, 10:20 pm
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Default Re: Will my ISA be taxed?

Actually thinking about it they did change 8938 so you only have to put it down on 1040 schedule B I think for the last few years for a cash ISA. But anyway, massive PITA.
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Old May 22nd 2018, 7:24 am
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Default Re: Will my ISA be taxed?

Originally Posted by Steve_ View Post
Actually thinking about it they did change 8938 so you only have to put it down on 1040 schedule B I think for the last few years for a cash ISA. But anyway, massive PITA.
I don’t see why a cash ISA is any more trouble than any other interest bearing account. If you have cash then you are going to keep it somewhere that generates some interest income and if you are a US citizen you cannot buy NS&I savings bonds. Any savings account is most likely going to have to be reported on FBAR and Schedule B, and possibly an 8938.
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Old May 23rd 2018, 9:50 pm
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Default Re: Will my ISA be taxed?

Well I agree, but grammatically I meant the OP's original situation was a massive PITA. Sorry for being unclear.

You have two options really, give the thing up, or make it into a cash ISA if you want to hold onto it. Unless of course you enjoy filling in 8621s or 3520/3520-As. But given that the income is still taxable (if there's enough of it, there's a de minimus limit for simple bank interest, $1,500 last time I checked), the cash ISA only really makes sense if you're intending on going back to the UK at some point.

It's questionable generally speaking whether it makes sense to hold securities denominated in foreign currencies because of exchange rate risk anyway, and also you have the fun of potential phantom capital gains to report.

I have this discussion with my US citizen relatives who live in the UK and they think they've been clever by using a cash ISA to reduce the reporting requirement - well, not really because you're only earning trivial interest.

I'm not really sure what the best method is for US citizens abroad. Anything in the foreign country is hugely complex to report plus you could end up with phantom USD capital gains on top of that - and the only alternative is to use a foreign broker registered in the US with the SEC who can invest in USD stuff and you get a 1099. But then you've got the exchange rate problem.

In Canada most people seem to opt for option B, i.e. invest in the US via a broker registered in the US and get a 1099, but CAD is usually in a fairly stable exchange rate range over the long term around 81 US cents, that's not necessarily the case elsewhere in the world. Plus US registered brokers get more expensive in other countries.

I notice the usual tactic nowadays if a US citizen inherits a UK account is to close the account, they just don't want the hassle.
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Old May 24th 2018, 7:57 am
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Default Re: Will my ISA be taxed?

We are fortunate enough to have been able to hold onto our US broker to continue to invest in equities so we have no long term savings in the UK. It does mean we are are very much subject to exchange rate fluctuations in all of our income as between us we have 2 US private pensions and will soon be drawing 2 US SS payments. Last year we bought a house and moved all the money over to buy it well ahead of time and I spread it over many savings accounts. That meant lots of accounts to report on the FBAR and because we hit the FATCA limits lots of forms 8938. What a PITA so I can’t imagine having to deal with PFIC’s as well.

We had a Skype session yesterday with our daughter in California who moves into her new house tomorrow. Although our brokerage, Vanguard, has our overseas address as our main address they also have our daughter’s address as our correspondence address. We each have an IRA and a Roth account plus my wife has all our regular savings in a Vanguard brokerage account. That is 5 accounts and I recently did a change of address online which means they send a letter to the old and new address for every account. Our daughter held up 10 envelopes with letters from Vanguard and said that as soon as the shredder is unpacked she will put it to use.
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Old May 25th 2018, 9:45 pm
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Default Re: Will my ISA be taxed?

The point I was making (very obliquely) at the end of my post is that you can't use your old broker, it's not legal under the laws of the foreign country. I don't know how much they give a crap in the UK, but if you are investing in securities you have to use a broker registered in your jurisdiction - and if you want to carry on investing abroad they have to be registered there too, that's why they charge so much. I think in the UK it's an FSA rule.

In Canada it's even worse because there is no central authority, it's done provincially, so the broker has to be registered both in your province and in the US with the SEC. The SEC has a special rule for RRSPs, so say you move to the US (or a US citizen moves to Canada and opens an RRSP), you can continue trading inside of your RRSP without the broker getting SEC registration, but it's of minimal help. Canadian financial institutions typically are registered with the SEC, but that's not typically the case in other countries and even if they are, the trading they allow you to do is probably more limited.

A lot of Canadians try and pretend they live in the US to get around brokerage fees and that blows up in their faces when they realize they're then treated as being US tax residents. We end up with these stupid ads going "our trading account is fantastic blah blah" and then at the end of the ad it always has something like, "offer not valid in Québec" or wherever because they're not registered there or a provincial rule makes it illegal.

I had a very surreal experience with a bank in the UK when they started questioning where I was resident for tax purposes due to the new OECD rules and I had to provide voluminous evidence I reside in Canada. So they e-mailed me about "residency indices" on my account saying it did appear I lived in Canada - to which I responded (unlike anyone else ever probably) that my cellphone is a US number and under the UK-US FATCA agreement they clearly hadn't checked my indices and they were breaking the law by sending me a stupid boilerplate response without actually doing any checking.

Whereas a Canadian bank on the other hand insisted I must be a US person because I had a US cellphone number so I had to go to the bank "to declare" I wasn't an American. I wondered whether I should show up with a marching band.

This is the difference between the UK financial system and the Canadian one, the Canadians fastidiously follow the rules and the British pay lip service to them. Which is why in Britain when they find out you're a US person there's a good chance your account will be closed whereas in Canada a special financial advisor sits down with you to explain the consequences. (Also the reason the UK went down the toilet in 2008 and Canada didn't).

Anyway back to the original topic - one option for an American in the UK would be to use a SIPP (exempt under the tax treaty), but this assumes you have pre-tax employment income to invest, and HMRC have buggered up SIPPs by reducing the lifetime allowance to £1 million. But it is something you can hold onto whether you live in the UK or the US. An IRA and a Roth account are obviously exempt too, but I'm talking about tax law, not trading regulations. There may be an FSA exemption rule that allows US citizens to carry on using a US broker in the US to deal with a US pension, but I'd look it up if I were you. Otherwise Mr FSA person might have to take time out from shovelling Russian money into the Treasury to wag his finger at you.
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