National Savings & Investment bonds - declare on FBAR?

Hi,

It's that time of year again :-)

I'm completing my USC wife's FBAR, and wondering whether to declare an NS&I index-linked savings bond in her name. (I'm a non-resident alien for US tax purposes.)

The IRS, at http://www.irs.gov/businesses/small/article/0,,id=210249,00.html, states that 'individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution'. This would seem to exclude it. But I wouldn't mind getting some corroboration.

Quite a few people invest in these things, so I was wondering if anyone else had bonds of this kind (or similar), and whether they had declared them?

Thanks a lot,
tolstoy_fan

The IRS text you cite relies on the US definition of "bond" which has to do with the government or a company borrowing money from you. As these organizations are not financial institutions, you don't have to list these bonds on your FBAR.

This is quite different to the UK meaning, which refers to what would be called a certificate of deposit in the US.

NS&I, though owned by the UK government, is a financial institution. In my view, an NS&I bond constitutes a bank deposit which needs to be reported on the FBAR.

I'd definitely declare all NS&I accounts on FBAR if you need to file one. One question I've always had is whether the equity bond products fall under PFIC rules, or are they all just interest saving accounts.

I believe that these are caught by the "OID" anti-avoidance regime so you may want to look at Publication 1212 to figure the annually reportable amounts http://www.irs.gov/pub/irs-pdf/p1212.pdf - (see page 10 onwards for how to do the maths)

Many thanks for the replies so far - I felt uneasy excluding the NS&I 'bond' from the FBAR, and I was clearly right :-)

Guya, I wasn't sure if your reply applied to my question, or to nun's? Does the information in pub 1212 apply to index-linked bonds, or just equity bonds?

While I'm here, I had a further question which I was hoping to make sure of:

Interest on the bond is paid annually, at a rate of RPI plus 1%. My wife bought the bond in May 2010, so no interest was paid during 2010. If she had redeemed the bond during 2010, the capital would have been repaid, but no interest or index-linking would have applied. Bearing this in mind:

- Do I declare the bond on the FBAR at the value she paid for it, or should I accrue for interest? I'm thinking the former, since we're using the cash method of accounting...

- On 1040 Schedule B, do we declare any interest on the bond for 2010? Using the cash method, I'd have thought not, but I'd appreciate confirmation.

Many thanks for your help.

Interest always works on the cash basis so you would always report it only when you receive it.

Guya, I wasn't sure if your reply applied to my question, or to nun's? Does the information in pub 1212 apply to index-linked bonds, or just equity bonds?

I think Guya is saying that your Index Linked Savings Certificate is rather like a US CD.

I believe that these are caught by the "OID" anti-avoidance regime so you may want to look at Publication 1212 to figure the annually reportable amounts http://www.irs.gov/pub/irs-pdf/p1212.pdf - (see page 10 onwards for how to do the maths)

Read that publication closely and you'll see that the list of OID items specifically excludes "foreign obligations not traded in the United States and obligations not issued in the United States".

I believe NS&I bonds should be treated in the same manner as a CD. They are simply not "bonds" in the US sense of the word.

I'd have thought when in doubt, err on caution and imclude anything that could be potentially considered a financial account, even the likes of oyster cards, prepaid phone sims, paypal, credit cards, etc.