What happens if a USC signs up to a S&S ISA?

Let's suppose a dual-nationality citizen has signed up to a stocks and shares ISA, and put in about £700. Said citizen does not earn any other money.

What happens next, in terms of taxation?

Let's suppose a dual-nationality citizen has signed up to a stocks and shares ISA, and put in about £700. Said citizen does not earn any other money.

What happens next, in terms of taxation?

There's no UK tax.

The IRS does not recognize the ISA and so looks through it and taxes the investments. So if you have individual stocks or bond the dividends, interest and capital gains will be taxed. If you own a UK stock or bond fund it will be taxed as a PFIC.

Thanks -- and what does PFIC mean in terms of declaring and paying extra taxes?

I'm the UKC and have zero experience in figuring out US taxes...

Unfortunately, possession of a PFIC for a US citizen unleashes the four death riders of bureaucratic apocalypse. Dealing with this properly requires the completion of complex forms requiring detailed financial knowledge of the contents and organization of the PFIC fund.

PFIC regulations were designed by the US finance industry and passed by their minions in Congress as a protectionist measure to stop US citizens buying non-US funds. They had no care for the impact this would have on US citizens overseas.

Sell now.

Even if said USC sells now, they will have had these funds for two months... does this mean it would still have to be declared?

Someone who was entirely ignorant of PFIC might declare this like the sale of any stock and pay for the capital gain (if any).

Even if said USC sells now, they will have had these funds for two months... does this mean it would still have to be declared?

You'll have to decide how to treat the PFIC and then you'll basically pay tax at income tax rates. Here is an worked example of one approach.

https://hodgen.com/back-to-basics-how-to-report-gain-on-the-sale-of-a-pfic/

There is a get out of jail free card for a PFIC acquired & sold in the same calendar year.

Fab - is there anywhere where that's quoted and confirmed?

There is a get out of jail free card for a PFIC acquired & sold in the same calendar year.

In the statute.

Is the "get out of jail" card filling out the paperwork using the M2M method at the end of each year and then paying any CGT on that even if you didn't actually sell it? 

https://hodgen.com/how-does-the-mtm-election-work-during-and-after-the-ovdp/

That was my understanding. This method is doable as long as the investment vehicle (either a stock for a public company or a share in a fund) is a marketable security; e.g. listed in a regulated exchange like the London Stock Exchange. 

Also, you might not have to report at all if you meet the requirements described in this article:

https://hodgen.com/what-is-the-annual-reporting-requirement-for-pfics/

For me, I'm going to do the MTM method for my USC/UKC daughters who have had money given to them by their UKC grandfather into a kid's ISA invested in some UK listed Vanguard funds.  Hopefully one of the experts will tell me that that's all wrong before I make a filing mistake!

Is the "get out of jail" card filling out the paperwork using the M2M method at the end of each year and then paying any CGT on that even if you didn't actually sell it? 

https://hodgen.com/how-does-the-mtm-election-work-during-and-after-the-ovdp/

That was my understanding. This method is doable as long as the investment vehicle (either a stock for a public company or a share in a fund) is a marketable security; e.g. listed in a regulated exchange like the London Stock Exchange. 

Also, you might not have to report at all if you meet the requirements described in this article:

https://hodgen.com/what-is-the-annual-reporting-requirement-for-pfics/

For me, I'm going to do the MTM method for my USC/UKC daughters who have had money given to them by their UKC grandfather into a kid's ISA invested in some UK listed Vanguard funds.  Hopefully one of the experts will tell me that that's all wrong before I make a filing mistake!

You cannot make a M2M election on a late filed return, as the law says you cannot. You could; however, make a M2M election on each of the children's 2016 US returns. Given the collapse in Sterling over the past 9 months, this might result in a loss - and at least probably no tax. Hopefully, the ISAs are featuring on your own FBAR if you have signature authority?

Excellent points @guya. And yes, they'll be included on my FBAR. 

We were thinking of having my husband open an ISA to protect some of his income from UK taxes, now i'm thinking maybe it's not worth it based on this tax issue?  On a related topic, my husband has a company pension plan, it's in mutual funds i believe, does this fall under the PFIC umbrella ? It doesn't have much in it as we only moved here last year. 
Thanks.

We were thinking of having my husband open an ISA to protect some of his income from UK taxes, now i'm thinking maybe it's not worth it based on this tax issue?  On a related topic, my husband has a company pension plan, it's in mutual funds i believe, does this fall under the PFIC umbrella ? It doesn't have much in it as we only moved here last year. 
Thanks.

Cash ISAs are fine. You get the UK tax advantages and any interest is treated as bank interest on your US tax return. The only reason I'm dealing with the stocks and shares ISA headaches is because my kids were given money by their UKC grandfather and I put it into the ISA without really thinking about it, and so trying to make the best of a not great situation, as once in the ISA, only the kid can take it out and only once their 18.

As far as pensions, they are slightly different. If it is a UK company scheme and is regulated by the UK government as a pension scheme, it's probably covered by the US-UK tax treaty which means that the bs around PFICs disappears. Each year when I file, I do have to fill out an extra form making a treaty exemption claim because my UK pension scheme does not conform exactly to IRS standards (I put in 6% of my gross salary, and the company only puts in 5%), however I fill out the extra form and say that it's a recognized UK pension scheme. Not had any issues yet, but I'm decidedly small fry. 

I also report my full gross salary on my IRS return (in theory, I believe I could report my gross minus my 6% pre-UK income tax pension contributions) and perhaps pay a bit less US tax, but I believe the general guidance is to report your full gross UK income to establish a basis when you start withdrawing the pension.