Filing with a Stocks and Shares ISA

Hi all,

I am a UK / US dual citizenship but have not lived in the US. I have not filed tax returns but I am now working on submitting under the Streamlined compliance program.

The main complication is that in May of this year I opened a Stocks and Shares ISA with TDdirect. US taxes were completely off my radar at the time, I knew that it was not a tax-protected US account but I have no other US taxable income and the amounts are low. It is only recently as I started to research filing in more detail I have found out that the Stocks and Shares ISA is a PFIC and apparently quite onerous to file and should be avoided by US citizens.

In my Stocks and Shares ISA I am holding a single fund Vanguard LifeStrategy Fund. MUTF_GB:VANG_LIFE_60_K6W1K3. It is currently worth £40 less than when I subscribed.

I plan to sell the fund and close the ISA before the end of the year so I will only need to include it in my 2013 filing.
I have read a lot of posts saying how difficult it is to file, but no actual details on what is necessary from a UK ISA perspective. I was wondering if anyone had any references or guides to FPIC reporting a UK online Investing ISA, or at least if there was any extra information I would need from TD Direct and/or Vanguard to enable completing form 8621 (and whether any other forms are necessary).

Any advice appreciated,

EDIT:
To be more specific. Which part must be reported as a PFIC - the "stocks and shares ISA" account, or the Vanguard fund, or both (would I need an 8621 for each)?

EDIT2:
Reasing this text

1. Receives certain direct or indirect distributions from a PFIC,
2. Recognizes gain on a direct or indirect disposition of PFIC stock,

I don't suppose by any chance there is a sort of loop hole where the fact that I didn't make any gain (lost money on my fund) or receive any dividends (reinvested, net value still down) means I might not have to file other than including it on the FBAR if I close it still at a loss?

The ISA is completely transparent for US tax purposes, so you file the 8621 and maybe the foreign trust forms for the UK domiciled Vanguard fund.

Thanks... Some of the things I read suggested the ISA was itself an PFIC (and that even if one held individual stocks in an investment ISA the PFIC requirements would still apply). Good to know thats not the case!

But do you think I could skip filing since if I sell now I will not have received any distributions or recognized any gain from/on my investment? (ie will have just owned it for 6months and made a small loss).

Whoa - the 8621 has a fixed $10,000 penalty for failure to file. Why not file it for 2013?

You won't of course know if you have made a gain or loss unless you have converted cost and proceeds using spot rates; but either way it is ordinary gain or loss as a current year PFIC transaction.

Whoa - the 8621 has a fixed $10,000 penalty for failure to file. Why not file it for 2013?

You won't of course know if you have made a gain or loss unless you have converted cost and proceeds using spot rates; but either way it is ordinary gain or loss as a current year PFIC transaction.

Thanks. I understood it would take several hundred pounds of accountant time to file the PFIC - I'm afraid I can't make any sense of the form or what information is required. If I understand I may need to submit a seperate PFIC for each of the non-US funds held in the Vanguard Lifestrategy fund.

I am not sure about your second paragraph. I have sold the fund now but I won't know the final price for a few days. But I am pretty sure it is less than I paid in May. What does "converted cost and proceeds using spot rates" mean?

But am I correct that if I held the PFIC for less than 1 year, within one calander year, and did not make any gain or receive any other disbursement then I do not have to file, and so would not face the penalty?

As another question. Is there anything else that could be held in a stocks and shares ISA or is it better just to close it completely with only this transaction and just accept that I lost the ISA allowance this year?

Thanks

Thanks... Some of the things I read suggested the ISA was itself an PFIC (and that even if one held individual stocks in an investment ISA the PFIC requirements would still apply). Good to know thats not the case!

The ISA is meaningless as far as the IRS is concerned. They just don't see it, they look through it to the investments within. So as your Vanguard fund is a UK domiciled investment fund it will be considered a PFIC by the IRS.

But do you think I could skip filing since if I sell now I will not have received any distributions or recognized any gain from/on my investment? (ie will have just owned it for 6months and made a small loss).

You must file. Whether or not you receive anything from the fund doesn't matter. One way to file under PFIC is to "mark to market" your funds even if you didn't actually sell them. This is a way to stop the practice of some funds that don't distribute income. So whatever you do you must file the PFIC.

FYI you could easily transfer your funds to one of the US domiciled Vanguard EFTs that can be bought from UK brokers and avoid PFIC and UK non-reporting issues.

You must file. Whether or not you receive anything from the fund doesn't matter.

Thanks again. But could you clarify this point? From the Form 8621 Instructions I see the following:

Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year under the following three circumstances:
1. Receives certain direct or indirect distributions from a PFIC,
2. Recognizes gain on a direct or indirect disposition of PFIC stock,
3. Is making an election reportable in Part II of the form.

Not much of that form is clear to me but this part at least seems to clearly state if there is no "gain on disposition" (which I read as proceeds from sale), and no "direct or indirect distributions" (which I read as dividend payments which I have not received) then it is not necessary to file (since there can be no tax to pay). In this case none of the three is true, so why do you say I have to file? (I am not trying to be difficult - I really appreciate the help and am trying to understand since this ISA thing got me in a bit of a panic today!).

Also is it the case that the PFIC nests, so that in order to file for the Vanguard LifeStrategy I would have to file PFIC for the ~10 or so funds it holds (ie Vanguard UK FTSE 100 etc.) This is why I am trying to avoid doing it. If it is just a matter of entering the sale + loss on a form then of course I would do it anyway, but I understood filing PFIC requires several hours of accountant time which is completely beyond me and I would like to avoid paying.

But on the second point you are saying it is OK to keep a US based fund inside the Stocks and Shares ISA (so it would be tax free UK, taxed normally as a US fund, although my ISA provider is unlikely to provide 1099s). Do you know of any such funds in GBP or would it require trading in USD (I am not sure if thats possible in my ISA).

Thanks again for your help

FYI you could easily transfer your funds to one of the US domiciled Vanguard EFTs that can be bought from UK brokers and avoid PFIC and UK non-reporting issues.

Is this possible within the ISA? As far as I can (link below) it is not possible to hold foreign ETFs inside a stock ISA, so it seems I really would be better off closing it ASAP (although maybe I could buy US based funds in a non-ISA UK Investment account).
http://the-international-investor.com/investment-faq/funds-etfs-eligible-held-isa

> Is there anything else that could be held in a stocks and shares ISA or is it better just to close it completely with only this transaction and just accept that I lost the ISA allowance this year?

At our firm we don't recommend that individuals hold any fund inside an ISA: invest directly instead and skip straight past PFIC considerations (as the CPAs at the last US tax conference in London heartily wished every UK res client would do). So an option: transfer the ISA to a self direct ISA and invest directly.
It's not just the ISA allowance this year you lose: it's the accumulation of gains UK tax free and income UK tax-light, and the eventual payment of income from an ISA UK tax free on current tax law that you lose. If you're careful to pay no more than 350 p.a. in all ISA admin charges, these features make ISAs better value than (UK) pensions: so I imagine most wealth managers would say 'do everything you can to keep it'.
As for limitations on what you can invest in an ISA, you tend to get stuck only when you're trying to buy international fixed interest stock.

Is this possible within the ISA? As far as I can (link below) it is not possible to hold foreign ETFs inside a stock ISA, so it seems I really would be better off closing it ASAP (although maybe I could buy US based funds in a non-ISA UK Investment account).
http://the-international-investor.com/investment-faq/funds-etfs-eligible-held-isa

Good point. I was thinking of US based ETFs like VTI, but I see that you can't hold that in an ISA.

http://www.hl.co.uk/shares/shares-search-results/v/vanguard-index-fund-total-stk-market-vipe

and no US domiciled Vanguard funds are on the Financial Services Register

https://www.fsa.gov.uk/register/cisMainSearch.do

So my advice would be to either buy individual shares in the ISA or just stick with a simple cash ISA.

Thanks again. But could you clarify this point? From the Form 8621 Instructions I see the following:

Not much of that form is clear to me but this part at least seems to clearly state if there is no "gain on disposition" (which I read as proceeds from sale), and no "direct or indirect distributions" (which I read as dividend payments which I have not received) then it is not necessary to file (since there can be no tax to pay). In this case none of the three is true, so why do you say I have to file? (I am not trying to be difficult - I really appreciate the help and am trying to understand since this ISA thing got me in a bit of a panic today!).

8621 is basically there to stop US citizens buying foreign funds, it protects the domestic mutual fund industry. It is also there to stop the practice of some foreign funds of not distributing income. So it doesn't matter if you received no distributions you have to pay tax on any fund earnings, even if you don't receive them, or you can mark to market.

So my advice would be to either buy individual shares in the ISA or just stick with a simple cash ISA.

Thanks. I think I do not have the time or interest to properly manage a portfolio of individual stocks - and the trading fees on the UK ISA (or UK investment accounts in general) are really high for the small value of my portfolio so I think I will close the investing ISA.

8621 is basically there to stop US citizens buying foreign funds, it protects the domestic mutual fund industry. It is also there to stop the practice of some foreign funds of not distributing income. So it doesn't matter if you received no distributions you have to pay tax on any fund earnings, even if you don't receive them, or you can mark to market.

OK - so I can chose the Mark to Market option for the 6 months I owned the fund and record my net loss. But what else do I need to do? I read the IRS estimates 22 accounting hours for each 8621 which for me is terrifying. The original question was to find out more details about what is necessary. In this particular case the Vanguard Lifestrategy fund owns many other funds. Do I need an 8621 for each of them? What information do I need to get from Vanguard in order to file this? Is there any guides online about how to do this - all I can find is articles saying how difficult it is!

 

May I add some comments to the discussion about ISAs held by US citizens?

Legal nature of ISA investments
A fundamental requirement of ISAs is that the account investments must be in the beneficial ownership of the ISA investor. This is set out in the Individual Savings Account Regulations 1998 reg 4(6)(a).
 
I assume that this means that while investments within the ISA might be caught by the US PFIC rules, the wrapper itself is not so caught.

Permitted investments
The ISA regulations set out the investments that are permitted by the tax rules. The ISA manager is not obliged to offer all these in his arrangement.

The list of permitted investments for a stocks and shares ISA are set out in reg 7; there are different rules for cash ISAs and those holding insurance products. These rules are long – they extend to over three pages- and are changed from time to time.

The key permitted investments are-
•   Shares listed on a recognised stock exchange.
•   Units in a UK or recognised UCITS and non UCITS retail scheme.

The first heading means that individual shares listed in both the UK and the US are permitted investments. The second heading is more technical but refers solely to funds authorised within the EU. In theory a US domiciled could apply to be treated as within these rules, but as far as I am aware, none have done so.