Dual Citizen- Can I invest in ISA?

Although I agree with the advice of most people here that it is not a good idea to invest in a stocks and shares ISA as a US citizen, it depends what exactly is meant by a "stocks and shares ISA"

If the ISA is used to invest in individual company shares which are traded at fair market value and managed solely by the US citizen, there is NO problem, other than the fact that you will still be liable for US tax on any gains. It will actually save you some paperwork by not having to file 1116s.

If the ISA is used for investing in pooled investments/mutual funds you have a PFIC problem.

I have asked several questions on this forum about this in the past.

Excellent points. I knew that you could invest in individual securities easily enough but I hadn't thought of the benefit of doing so in an ISA means no UK taxes so no form 1116 to file to get credit against the US taxes you'll be paying on the dividends and capital gains.

If the ISA is used to invest in individual company shares which are traded at fair market value and managed solely by the US citizen, there is NO problem, other than the fact that you will still be liable for US tax on any gains. It will actually save you some paperwork by not having to file 1116s.

If the ISA is used for investing in pooled investments/mutual funds you have a PFIC problem.

It's for those far more knowledgeable then I as to how this all works and whether it avoids the PFIC rules, but are you talking about a "Self-select ISA"?

http://www.thisismoney.co.uk/money/diyinvesting/article-1718291/Pick-best-cheapest-investment-Isa-platform.html

http://www.moneysupermarket.com/savings/self-select-isas/

The Vanguard UK site with self-select:
https://www.vanguard.co.uk/uk/portal/searchresults.htm?searchtext=self select isa

I've seen various names used for different types of isa's. From a US tax perspective the name is irrelevant, but rather what types of investments are being made.

From a US tax perspective the name is irrelevant, but rather what types of investments are being made.

Yes, I realise that, just looking for a way to find funds over the internet.

For example, TD Direct goes (eventually) to this page:
http://www.tddirectinvesting.co.uk/choose-an-account/trading-account/?utm_expid=106966553-2.4DFg3AjiQ8CU2w99gPqlbQ.0&utm_referrer=http%3A%2F%2Fwww.tddirectinvesting.co.uk%2Fchoose-an-account%2Ftrading-isa%2F

Scroll down to stocks and shares ISA and you find:
http://www.tddirectinvesting.co.uk/choose-an-account/trading-isa/

Scroll down to fund selector and you find:
http://www.tddirectinvesting.co.uk/investment-choices/funds-overview/fund-selector/

Filter for "growth" and "Vanguard" (for example, there's lots to chose from) and 18 funds are listed.

Are these stock and shares ISA's that conform with avoiding PFIC rules? Are they ETF's under an ISA wrapper?

ISA rules indicate that you may only have one ISA provider per year. Can there be two providers if one does a stocks and shares and the other does a cash ISA? If there can only be one provider for your ISAs per year, it would seem being in a set up such as this would require year on year staying continuously with the same provider, and not having access to a cash ISA if you wish to split the ISA allowance for the year. Any thoughts on this aspect?

Scroll down to fund selector and you find:
http://www.tddirectinvesting.co.uk/investment-choices/funds-overview/fund-selector/

Filter for "growth" and "Vanguard" (for example, there's lots to chose from) and 18 funds are listed.

Are these stock and shares ISA's that conform with avoiding PFIC rules? Are they ETF's under an ISA wrapper?

The Vanguard funds you've found can all be held and traded inside an ISA to avoid UK tax. They can also be held outside an ISA if you want....although you'd probably only do that once you've used up your ISA allowance.

The funds are OEICs (Open Ended Investment Companies) and would be called mutual funds in the US. They are structurally different from Exchange Traded Funds. The critical thing for US people is that all the funds are UK domiciled and managed by Vanguard UK and so would fall under PFIC regulations. A clue to this is that they are denominated in GBPs and have ISIN numbers rather than the US CUSIP numbers. I went over to Hargreaves and Lansdown's site and see that the two US Vanguard funds they offered have been replaced two new funds that invest in the same stocks but that are managed by Vanguard UK. I deduce that anyone interested in buying US funds that are HMRC reporting will have to ask a UK broker directly or go through a US broker.

It looks like the path of least resistance for the US citizen resident in the UK is going to be individual shares, but I swore off that particular activity after a few up and down years and some frustrating paperwork to do my taxes.

FYI here are all the foreign HMRC reporting funds. US citizens should not buy anything without a CUSIP number, and should double check that the fund is US domiciled, that's if they can work out a way to buy the funds in the UK.

https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds

... US citizens are safe to buy anything with a CUSIP number, that's if they can work out a way to buy the funds in the UK.

Charles SCHWAB in London will help out.

Nice find. Schwab has a good reputation in the US as a low cost provider. You will have to make sure you understand any fees associated with specialist services, but you could give them a call and ask if you can buy US Vanguard ETFs or other US domiciled funds that are UK reporting through them.

http://www.schwab.co.uk/public/schwab-uk-en/us-investing/us_expat_essentials

I need to go back and re-read this post since I am one of those people trying to turn more UK oriented. I have retirement money in Vanguard and my Govt TSP.....and to make things simpler I was planning on draining the Vanguard money over the next few years......both to keep my savings high to make the rest of the visa process simpler...but also to move money to where my wife can get to it easier if I die on the golf course (like I could get on the course these days up north.....stop the rain!!!). The TSP money will only be taxable in the UK if I die. But I was kind of hoping when selling off the Vanguard money to have that in my wife's name in some kind of an ISA etc since it will be a long time until she will bring in enough money to hit the UK tax threshold. I also need to commit myself one way or the other to taking my wife off my US taxes.

An "Aunt Sally". (For those who don't know what an Aunt Sally is, it's a summation which invites others to shoot holes in it.)

The topic was UK stocks and shares ISAs for those with US citizenship.

As nun has repeatedly pointed out, to be free of PFIC constraints, any stocks or shares investment in the UK must have an US CUSIP number. That seems to greatly limit what is available. One also has to navigate the "are you a US Person" question, which may also limit which UK companies allow one to invest. robertUSA has mentioned Charles Schwab which appears to be US friendly. Since there is no mention of ISAs on the Schwab site, one assumes if a stocks and shares ISA was desired, it may require personal contact with Schwab?

We've also not mentioned cost or minimum investments (a consideration which pertains to Schwab and all others).

The gains on the stocks and shares ISA is tax free in the UK, but taxed in the US. There is a £10,000+ tax free threshold in the UK on gains, so the question is: what is the advantage to a UK stocks and shares ISA (if it is indeed possible to have one) for a USC unless the yearly gains are above £10,000+? Is this the point robnw was making?

As for US reporting, someone filing the FEIE (2555) only has the summation of the standard deduction plus the personal exemption as a cushion for the total of all investments (or additional income) if they wish to remain below a threshold in the US with no tax due. For someone filing 1116, it becomes a bit more delicate with a need to have additional taxed investments to help offset any US tax resulting from a UK tax free ISA. This applies to both cash ISAs and a potential stocks and shares ISA.

An additional option is to self-invest in company shares.

Most on this site wish to retain US ties so investing in the US, which now seems a requirement if stocks and shares are involved, may not be an issue. For those who wish to become more UK-centric, it may cause reluctance. There's also the issue of exchange rates. I've lived in the UK through the extremes; exchange rates have varied from $1.05 to $2.05  to the £ during these years.

The summation: is it logical to invest solely in a UK cash ISA for the UK tax free element, and then separately invest in a (US CUSIP) investment knowing the first £10,000/year will be tax free in the UK?

   

An "Aunt Sally". (For those who don't know what an Aunt Sally is, it's a summation which invites others to shoot holes in it.)

The topic was UK stocks and shares ISAs for those with US citizenship.

As nun has repeatedly pointed out, to be free of PFIC constraints, any stocks or shares investment in the UK must have an US CUSIP number.

This isn't quite right. There are no tax problems with buying individual shares of a company, the problems of PFIC and HMRC reporting only arise when buying collective investment funds, like mutual funds, ETF etc. So the US person is ok to buy individual stocks on the NYSE, FTSE etc but should only buy investment funds that are both HMRC reporting and US domiciled.

Both the US and the UK have tax rules that allow you to get certain amounts of investment gain tax free. For the IRS people in the 15% tax bracket (or under) pay no tax on long term capital gains and or qualified dividends. In the UK there is an 11k GBP tax free allowance and this year there will be a 5k GBP tax free allowance for dividends. If you have avoided PFIC and HMRC reporting issues there are still problems in resolving the different ways your investment returns are reported and classified when you come to do your taxes.

The simplest solution is to keep all your stock and bond investments inside a pension wrapper and save cash outside.

Also watch out that you research and understand exactly what you are buying as sometimes the same words are used to describe different things in the US and UK. An example would be a UK savings bond. This is not a bond as understood in the US, but rather the equivalent of a US Certificate of Deposit (CD) where your principal is guaranteed and you get a rate of interest that increases with the term of the deposit.....

I assume forum readers are in similar situations. What investments do you advise?

I have no advice. I can only relate what I have.

We own a home. I have pensions, both on this side of the Atlantic and US SS. I have a cash ISA and numerous fixed rate, term savings accounts. That's all, and that's the way it's always been.

After reading this thread, I have no intentions of making any alterations.

I have no advice. I can only relate what I have.

We own a home. I have pensions, both on this side of the Atlantic and US SS. I have a cash ISA and numerous fixed rate, term savings accounts. That's all, and that's the way it's always been.

After reading this thread, I have no intentions of making any alterations.

For most people that seems appropriate.

Today a pension will probably be defined contribution meaning that both you and your employer put some money into an account that is usually tax deferred and you manage the account yourself and decide what investments to buy from a range offered by the pension administrator. The US/UK tax treaty insulates you from a lot of the tax issues that owning a foreign pension would usually involve.

When you retire you take the money out and it's taxed as income or you buy an annuity to produce the income. The choice and management of the funds will dictate the size of your final "pension pot". Most pensions will offer a "Target Retirement Date" type of fund that adjusts the sort of investments it holds from riskier stocks when you are young to safer bonds and cash investments as you approach retirement. How you set and manage this asset allocation is an enormous subject, but if I was to give one piece of advice it's to keep fees and costs to a minimum (hopefully less than 0.5% although that might be tough in the UK) and to invest only in index tracker funds, or Target Date funds if you want to be a bit more hands off.

The other type of pension is called defined benefit in the US (final salary in the UK) and is calculated from your length of service and salary. You will probably also have to contribute to this scheme, but you don't have anything to manage as the money is held in trust by the pension administrators.

Combine regular pension savings into stock market based funds, with a house and some savings bonds in cash ISAs and you can be quite well diversified. Using an ISA is probably worth it just to make sure there is no UK tax even thought some people with low incomes can get UK tax free interest. The UK interest will be US taxable as ordinary income....although not excludible with FEI...so you have to go through the usual tax scenarios as to whether it's best to use FEIE or FTC. One advantage of stocks and shares and mutual fund investments outside of retirement wrappers is that both the UK and US have some quite generous tax free allowances for dividends and capital gains.

Finally just a mention of the ROTH. It is a US retirement account funded with taxed money that grows tax free and withdrawals are also tax free, that goes for both the US and the UK. It has some fairly flexible withdrawal rules too. If you can show earned income on your 1040 and have an account already set up in the US (or can find a way to open one, perhaps by using a relative's US residence address etc) they are a nice thing to have.