Why “tax-free” isn’t tax-free for you
UK tax breaks only apply to UK tax. As a US citizen or green card holder, you still report the income and gains on your US return, and the US doesn’t recognize ISAs.
Product by product
| Product | UK | US | Usual view for Americans |
|---|---|---|---|
| Cash ISA | Interest tax-free | Interest taxable | Can be fine, as long as you report the interest |
| Stocks and shares ISA (funds) | Tax-free | Funds usually PFICs: harsh tax and extra forms | Usually avoid |
| Stocks and shares ISA (individual shares) | Tax-free | Dividends and gains taxable | Possible, but you lose most of the benefit |
| Lifetime ISA | Tax-free, plus a government bonus | Bonus and growth likely taxable | Needs advice |
| Junior ISA | Tax-free | Same issues as above, for your child | Needs advice |
| Premium Bonds | Prizes tax-free | Prizes taxable income | Report any prizes |
The PFIC problem
Most UK funds and ETFs are passive foreign investment companies (PFICs) for US tax. Without special elections, gains are taxed at the top US rate with an interest charge, and each fund needs its own Form 8621. That cost usually outweighs the UK tax saving.
What Americans usually do instead
- Use the UK workplace pension, which is generally respected by the US–UK treaty. See UK pensions for Americans.
- Hold individual shares rather than funds where investing in taxable accounts.
- Keep investments in US accounts where the provider allows UK-resident customers.
- Use a cash ISA for savings, and report the interest in the US.
What to do next
Cross-border investing is an area where advice usually pays for itself. Build your move plan to see your investment steps in order.
Free · about 2 minutesSee every step for your moveBuild your move planRelated guideWhat happens to my 401(k) and IRA when I move to the UK?Related guideHow do I build a UK credit history?
General information, not personal advice. Spotted something out of date? Tell us.