ISAs: Is it correct that there is no point in US citizens owning them?

I am absolutely mystified by this, but given the hours of research I have done, I have reached the conclusion that there is literally no tax benefit whatsoever for a US citizen to own an ISA.  Period.  Am I missing something, or is this correct?

What I don't understand is:  if this is right, why don't you see more tax advisors being vocal about this?  I see loads of warnings about PFICs and foreign trusts, but I don't think I've come across a single expert saying, without qualification, that there is no point in a US citizen opening an ISA account.

Thoughts?

I suppose if you were considering relinquishing or renouncing US citizenship at some point in the future, it would be advantageous to have started accumulating funds in an ISA sooner rather than later.

We are US citizens and we have cash ISA's, even though the interest is taxable by the US.

I agree that stocks and shares ISA's should not be owned by USC's because of the PFIC costs when filing US taxes.

Interest obtained on a sum deposited in a cash ISA might accrue US tax,  but this might be less than UK tax than it would accrue If the same sum were on deposit outside an ISA. The same could be true for dividends obtained within a stocks and shares ISA.

Since April 2016, basic rate taxpayers can earn £1000 in interest UK tax free in a normal non-ISA bank account. For higher rate payers, the amount is £500 tax free. Given the very low rates paid in interest these days, you would need a fair amount saved before you exceed these limits. So the relative value of a cash ISA has been much reduced for all UK tax payers. Unless you have a larger amount, it's not worth bothering with a cash ISA. Of course, for us lucky US persons, the big hand from across the Atlantic will be reaching out and into our pockets for this UK tax free amount. When Osbourne announced this break, it was like giving a kid an apple as a Halloween treat for us.

You can safely own individual shares, such as Tesco or Shell, in a stocks and shares ISA. You can avoid the UK tax on these but the US will still want its "fair share". Even so, you can still come out ahead of the non-ISA alternatives.

In the UK, the top rate of tax is 45% - so an ISA is a way of avoiding this compared to a regular bank account (of course, not everyone will pay tax on their interest and if they do, it may not be at this rate). In the US, the top rate is 39.6%.   So there is a saving in having a cash ISA, even for a US citizen. 

Stocks and Shares ISA's will probably end up in the PFIC category, so best avoided - though as someone else has already said, if you can find a S&S ISA that invests only in individual shares (rather than funds) it could still be worth doing for a US citizen.

Hi, DorsalFinn.

I do agree with you that there is some savings, but as Weller pointed out, I think, the amount of money that you save is pretty insignificant in a calendar year for most people.  I mean, if you have 50K GBP in your cash ISA at a rate of 1.2%, then you would get 600GBP in interest for the year.   If the IRS gets a third of that, then you are still left with 400GBP -- better than nothing, but it still takes a sizeable balance to even get that.

I'm confused about why the S&S ISA -- invested in individual stocks -- would be good for a US citizen.  He/she is still subject to US taxes on the dividends and capital gains, right?  So what is the tax advantage? 

It sounds like you are saying that there is no real harm in an ISA for a US citizen-- which I agree with -- but no tax advantage, either?

Actually, i'm saying that there is a tax advantage of a cash ISA for a US citizen in limited circumstances. In your example, you refer to interest of £600.   If this is outside an ISA, in a regular UK bank account, tax for a top-rate taxpayer in the UK is going to be £270, so net will be £330, no US tax is due after Foreign Tax Credits.   In an ISA, only US tax will be due  - so the US tax due will be around £238, net will be £362.    I agree it's not much but thirty quid is thirty quid, especially when you basically don't need to do anything much to save it!   

Re the S&S ISA investing in individual shares - same applies. If the dividends are qualifying for US tax purposes, then US tax may be at 20%.   In the UK, outside the ISA, tax may be due at close to 40% on dividends. 

Of course, all of this stuff is negated when looking at those that don't pay tax in the UK at the 45% rate, and the margins are small. And on top of that, a US person may need to pay the Net Investment Income Tax which makes the margins smaller still.  But this is why you won't hear US/UK tax advisors (for my sins, I am one!) making a broad statement that ISA's are pointless for US citizens.