Capital or Income Tax on Foreign Shares?

Perhaps you could explain what administrative cost you feel is associated with a cash ISA. It's similar to a standard UK savings account, so there is no administrative fees with the bank/building society. Just a fact check: you do agree that a stocks and shares ISA is an entirely different animal to a cash ISA, with the one common similarity that neither are tax free in the US?

Xpost with DSL

The administrative cost I'm referring to is the "tax professional" cost and/or the time spent by the investor to satisfy US compliance and disclosure requirements. Not the fees charged to establish and/or maintain the cash ISA.There are many different flavors of cash ISA's. Here is simply one example by Aviva that I consider to be a trust.

"Your investment goes into the Cash Fund, which is one of the funds available in the Aviva Investors Investment Funds ICVC (Investment Company with Variable Capital) which is a collective investment scheme".

For purposes of U.S. federal income tax, a "trust" is defined to mean an arrangement by which title to property is held by a person or persons, with a fiduciary responsibility to conserve or protect the property for the benefit of another person or persons. Thus, a trust is an arrangement by which trustees take title to property for the purpose of protecting or conserving the property for the beneficiaries.

The various forms necessary for compliance have been discussed previously. I'd add form 926 to report the transfer of assets to the trust. Yes, I agree with your last statement and based upon my research, in most cases, I'd recommend against investing in either of these "animals".

Thanks for your reply, it gives an insight to your thinking. I'll leave the trust issue for others to comment on and stick with the cash ISA question.

I agree the US taxpayer must be careful when selecting an ISA. Advertising in the UK can be misleading from a US perspective. I've gone to the Aviva web page and found the following statement: The Investment ISA is a Stocks and Shares ISA. The cash fund ISA includes this statement: With a traditional cash ISA, you invest in deposits or interest-bearing accounts. However, the Cash Fund ISA is different because it allows you to invest in a fund. If you are referring to a different ISA from Aviva, let us know which one specifically.

I still struggle to determine how a (traditional) UK cash ISA is any more complicated to report than an ordinary UK savings account.

Hello to everyone, I've been reading through this very informative forum and find the information helpful. I wanted to ask more about the cash ISA, or any other U.K. bank account where the interest is paid gross. Assuming that you have no previous year's tax credits, would you need to file an 1116? Or can you just report the income on line 1 of schedule B and line 8a of the 1040?

Say you have tax credits from previous, or current year's (passive category) and you win a cash, or none cash prize, (from the U.K.), can this prize amount be added to the 1116 to take advantage of the credits? Would the prize amount need to be added to schedule B and or reported on line 21 of the 1040?
Thank you

For 2011/2012  the maximum contribution to a cash ISA is £5,340. Your argument does not make practical sense as the yield from a cash ISA would not be sufficient to offset the administrative time and cost for a US Citizen.

You can get 4.4% in a cash ISA. Building a cash ISA ladder is a good idea for anyone who wants to get some return on money they intend to use in the UK and avoid currency fluctuation issues. It's a simple enough thing to do as far as tax reporting is concerned and while 4.4% is not in "Mitt Romney returns" territory it's ok as part of a portfolio for the small investor.

The Aviva cash ISA sounds very much like a money market account and I agree that that is a pooled investment, however, would USTAXHELP consider this to be a trust or a pooled investment, or just an interest bearing account much like a US CD.

http://www.halifax.co.uk/savings/accounts/cash-isas/isa-saver-fixed/

and if the latter then would they revise the blanket statement about ISAs being bad for US citizens?

There is a regulatory difference. How this plays out under different scenario's beyond the tax consequence is beyond my expertise.
Bank
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Due to their critical status within the financial system and the economy generally, banks are highly regulated in most countries.
Foreign Trust
Foreign trust commonly refers to a trust that is governed by the laws of a jurisdiction other than the United States. These trusts may be used for investment, estate planning and succession planning purposes, but are most commonly used for asset protection.

"...would USTAXHELP consider this to be a trust or a pooled investment, or just an interest bearing account much like a US CD". Ask for the brochure or prospectus for the cash ISA and if it says regulated by the Financial Services Authority (FSA) it is not a bank account and I'd consider it a "trust" even if the product is dished-up by a bank.

"...would USTAXHELP consider this to be a trust or a pooled investment, or just an interest bearing account much like a US CD". Ask for the brochure or prospectus for the cash ISA and if it says regulated by the Financial Services Authority (FSA) it is not a bank account and I'd consider it a "trust" even if the product is dished-up by a bank.

The brochures I've read for Halifax fixed saving accounts AND checking accounts all mention the FSA as regulator for all services except lending. So by your reasoning a UK bank account may well be a foreign trust.

From the Financial Services and Markets Act 2000, Part 1, The Regulator:
http://www.legislation.gov.uk/ukpga/2000/8/contents

From the FSA FSCS list (on the FSA site)
http://www.fsa.gov.uk/consumerinformation/uk_groups

That's a lot of institutions, with a lot of bank accounts that could be foreign trusts.

From the FSA FSCS list (on the FSA site)
http://www.fsa.gov.uk/consumerinformation/uk_groups

That's a lot of institutions, with a lot of bank accounts that could be foreign trusts.

If you had to file a 3250 for any account you had with those institutions I can see the "administrative burden" being quite high.

I'm not a tax professional, but if I had a fixed rate bank savings account inside an ISA I would not file a 3250; I would simply report the ISA account interest as bank interest on my Schedule B and 1040, file the FBAR if necessary and take foreign tax credits on 1116 to offset any US tax due on the interest. As the interest income is "passive" you'd have to have credits in the passive bucket to apply, but if you don't I believe that it would still be covered by your standard deduction and exemption. Maybe OAP can confirm this.

My reference to FSA as the controlling factor was incorrect.
"Who regulates British banks"?
A so-called "tripartite arrangement" divides responsibility for regulating banks and the wider financial system between the Treasury, the Bank of England and the Financial Services Authority.

The Treasury is responsible for the overall institutional structure of regulation and provides the link between the regulating authorities and government.

The Bank of England is responsible for assessing the robustness of financial markets and overseeing the financial system's infrastructure, including the payments system.

The FSA is responsible for the authorisation and supervision of individual banks, building societies, insurers and other financial firms, and for the supervision of financial markets.

My conclusion remains that I would not recommend any form of ISA to a US citizen.

"... take foreign tax credits on 1116 to offset any US tax due on the interest". If the ISA is not taxable by HMRC I'm not sure where you are getting the credits from?

Nun,
I think everyone is making a sincere effort to assist the OP in what I think we can all agree upon is a complicated subject. For you to characterize my post as "bogus" is inappropriate for a public forum. I have a CPA license at risk and the potential for an IRS Circular 230 violation by providing my clients incorrect information and exposing them to horrendous penalties for non-compliance. I have evaluated the positive contributions made by other members, conducted my own research, and reach my conclusion on this subject. This will be my final post on this thread

Yes I apologize. I was wrong to use such a forceful term. I have deleted the post as it reflects badly on me! However, I still do not agree with your conclusions regarding the cash ISA or understand your reasoning. If the IRS looks through the ISA wrapper to the underlying investments a cash ISA containing a fixed interest bank savings account would surely just be a foreign savings account paying interest; no trust or PFIC issues. An ISA held by an investment company and invested in foreign mutual funds would come with the trust and/or PFIC issues.

While each set of facts is different the view from dual US/UK qualified professionals is the financial institution is a "custodian" of assets.

If the assets are cash then this is reflected on the FBAR and Form 8938 and Schedule B for income.

From a US tax perspective a US person would not typically invest in a PFIC (eg a unit trust, investment trust or OEIC).

I have never until this past week seen as ISA described as a trust of any fashion under US law.

Now of course a section 529 plan or a Revocable California Living Trust is a quite different animal as these clearly are trusts under the UK definition of a foreign trust.

While each set of facts is different the view from dual US/UK qualified professionals is the financial institution is a "custodian" of assets.

If the assets are cash then this is reflected on the FBAR and Form 8938 and Schedule B for income.

From a US tax perspective a US person would not typically invest in a PFIC (eg a unit trust, investment trust or OEIC).

I have never until this past week seen as ISA described as a trust of any fashion under US law.

Agree completely.  I have heard the trust perspective before but not in a reputable context.

Agree completely.  I have heard the trust perspective before but not in a reputable context.

That's interesting, it may be impolitic, but what do you mean by "not in a reputable context" (I completely understand if you don't answer that).

I see the ISA and it's Canadian counterpart the Tax Free Savings Account (TFSA) described as foreign trusts on several US tax professionals's websites and indeed here

http://www.uk-yankee.com/articles/us-tax-guide-americans-living-uk
http://hodgen.com/form-3520-a-filing-deadline-is-march-15-2011/
http://forums.serbinski.com/viewtopic.php?t=3972&sid=6d4c18e6dde91dc80c7e16e2b2d1b597

they mention IRS rulings, but I can't find them online.

I moved my response to the other thread to keep everything together.