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Topic: What is an ISA to the IRS?  (Read 13704 times)

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Re: What is an ISA to the IRS?
« Reply #15 on: January 25, 2012, 02:32:03 PM »
This posting has become confused because of the failure to recognise the two different kinds of ISA.

A CASH ISA is a straightforward interest bearing account. Tax free in the UK, but taxable in the USA.

A STOCKS AND SHARES ISA may invest in stocks, shares, mutual funds etc which again is tax free in the UK but taxable in the USA. Depending upon the exact investment made this may bring into play PFICs and Foreign Trusts.


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Re: What is an ISA to the IRS?
« Reply #16 on: January 25, 2012, 03:24:25 PM »
This posting has become confused because of the failure to recognise the two different kinds of ISA.

I deliberately didn't distinguish between a cash and stocks and shares ISA as whenever I've seen the ISA described as a foreign trust that distinction is also never made. I was trying to find out how the tax free wrapper of the ISA itself should be dealt with or even if that its a valid question without any knowledge of the underlying investments.


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Re: What is an ISA to the IRS?
« Reply #17 on: January 25, 2012, 04:01:25 PM »
I deliberately didn't distinguish between a cash and stocks and shares ISA as whenever I've seen the ISA described as a foreign trust that distinction is also never made. I was trying to find out how the tax free wrapper of the ISA itself should be dealt with or even if that its a valid question without any knowledge of the underlying investments.

Nun, I think you are right, it is not a valid question. The ISA wrapper is tax free in the UK, taxable in the USA.  That is about all you can say about ISAs generally.

How it is treated in the USA depends on the underlying investment. ISA itself means nothing in the USA and is not mentioned in the tax treaty.

It is unfortunate that many sites do not make (or understand) the different types of ISA and therefore make general and inaccurate statements.


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Re: What is an ISA to the IRS?
« Reply #18 on: January 25, 2012, 04:52:22 PM »
Nun, I think you are right, it is not a valid question. The ISA wrapper is tax free in the UK, taxable in the USA.  That is about all you can say about ISAs generally.

How it is treated in the USA depends on the underlying investment. ISA itself means nothing in the USA and is not mentioned in the tax treaty.

It is unfortunate that many sites do not make (or understand) the different types of ISA and therefore make general and inaccurate statements.

I agree with you. I'm going to call the IRS office at the London Embassy and ask what forms are needed to file for a cash ISA just to see if they have any idea. They must have been asked this before.

As I mentioned before there is a Canadian Tax Free Savings Account, the TFSA, which  seems very similar to the ISA and is described by many as a "foreign trust" for US tax purposes. Interestingly there are 3 types of TFSA; deposit, annuity and trust. So maybe people are once again applying the "foreign trust" description without regard to the actual structure of the account.
« Last Edit: January 25, 2012, 05:22:51 PM by nun »


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Re: What is an ISA to the IRS?
« Reply #19 on: January 26, 2012, 11:39:43 AM »
I just got off the phone with the IRS at the London Embassy. I asked "what forms were required by the IRS to declare the interest on a cash ISA". The answer was Schedule B and they also mentioned the possibility of needing the FBAR form. I pushed a bit and said that I'd heard that I had to file a foreign trust form. The reply was that if it's just a cash ISA savings account that's not necessary.

Now I feel all warm and fuzzy!
« Last Edit: January 26, 2012, 12:01:38 PM by nun »


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Re: What is an ISA to the IRS?
« Reply #20 on: January 26, 2012, 12:58:41 PM »
Good work Nun.  Thanks for getting this clarification.


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Re: What is an ISA to the IRS?
« Reply #21 on: January 26, 2012, 01:39:29 PM »
A gold star! Good work thanks.  :)


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Re: What is an ISA to the IRS?
« Reply #22 on: February 06, 2012, 06:00:45 PM »
I am trying to understand the fundamental legal status of an ISA.  If a CASH ISA is a straightforward interest bearing account, how is it legally different than a non-ISA cash interest bearing account?  I understand that there are UK tax benefits to the ISA, but what makes an account an ISA account?  Is there some special legal arrangement?  If yes, what are the specifics of the arrangement? 

If there is a special agreement between the bank and the ISA owner of the account, it would be helpful to post the language of this agreement.  Thanks.


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Re: What is an ISA to the IRS?
« Reply #23 on: February 06, 2012, 06:45:21 PM »
I am trying to understand the fundamental legal status of an ISA.  If a CASH ISA is a straightforward interest bearing account, how is it legally different than a non-ISA cash interest bearing account?  I understand that there are UK tax benefits to the ISA, but what makes an account an ISA account?  Is there some special legal arrangement?  If yes, what are the specifics of the arrangement? 

If there is a special agreement between the bank and the ISA owner of the account, it would be helpful to post the language of this agreement.  Thanks.

The ISA is a tax wrapper set up by the UK Government. This only has meaning for UK tax. It is irrelevant to the IRS. It can go around a range of accounts and investments. There will then be language between the customer and the investment company or bank that describes the particulars of the account. Interpretation of that arrangement will determine how they will then be taxed by the IRS.


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Re: What is an ISA to the IRS?
« Reply #24 on: February 06, 2012, 07:35:28 PM »
I pulled the following from http://www.tisa.uk.com/regulations/42_ISARegs_2011B.pdf

The ISA must at all times be managed by an account manager and under terms agreed in a recorded form between the account manager and the account investor.  SI 1998 No. 1870, Regulation 4(5).

The account investments must generally be in the beneficial ownership of the account investor.  SI 1998 No. 1870, Regulation 6(a).

Except in relation to qualifying investments for a cash component, the title to account investments generally must be vested in the account manager or his nominee or jointly in one of them and the account investor.  SI 1998 No. 1870, Regulation 4(6)(b).

In the non-cash ISA it would appear that the account manager takes title to the property and holds the property for the benefit of the account investor.  This type of arrangement is similar to the concept of a trustee taking title to property and holding the property for the benefit of a beneficiary.  This similarity may be where folks are getting the idea that an ISA might be considered a trust for U.S. tax purposes.

I have not worked through the regulation, but it does appear that the title to the cash in a cash only ISA may remain with the account investor.  If the account investor retains title to the property in a cash only ISA, then this may be enough to prevent the arrangement from being a trust for U.S. tax purposes.


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Re: What is an ISA to the IRS?
« Reply #25 on: February 06, 2012, 09:16:11 PM »
Yep that was the whole thrust of this thread......the ISA tax wrapper means nothing to the IRS, it's the structure of the underlying investment. Some people argue that stocks and shares ISAs are foreign trusts and others that they are PFIC, although if you owned individual stocks PFIC wouldn't come into play. It's interesting to see the actual wording of the UK legislation and I can see the argument for a stocks and shares ISA being a foreign trust, but it also confirms the non-trust status of the cash components of an ISA.

Bottom like

cash ISA - good
stocks and shares ISA - bad
« Last Edit: February 06, 2012, 11:11:03 PM by nun »


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