UK Individual Savings Accounts for Americans: Know the differences
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Table of Contents
What is an Individual Savings Account and who is eligible?
An Individual Savings Account, also known as an ISA, is a UK-based savings or investment account that lets you grow your money tax-free; well, tax-free from the UK’s perspective. There are a few types of Individual Savings Accounts to choose from:
- Cash Individual Savings Accounts are basically savings accounts where the interest you earn isn’t taxed.
- Stocks & Shares Individual Savings Accounts let you invest in things like mutual funds, stocks, or bonds, and the growth and dividends aren’t taxed in the UK.
- Innovative Finance Individual Savings Accounts are for peer-to-peer lending platforms and similar alternatives.
- Lifetime Individual Savings Accounts (LISAs) are designed to help you save for a home or retirement, and the UK government even throws in a 25% bonus on top of your savings.
To open an Individual Savings Account, you usually have to be a UK resident and at least 18 years old (or under 40 if you’re going for a LISA). That includes US citizens living in the UK, as long as you’re tax-resident in the UK.
Now, here’s the thing. Not every UK provider will let Americans open an Individual Savings Account. Some financial institutions avoid working with US citizens because of all the extra paperwork (thanks, FATCA). But others, like Hargreaves Lansdown or AJ Bell, still accept US expats, so it’s just a matter of checking with the provider.
How the IRS treats an Individual Savings Account: US taxation explained
The IRS doesn’t recognize Individual Savings Accounts as tax-free accounts.
That means anything you earn inside an Individual Savings Account, such as interest, dividends, or capital gains, still gets taxed in the US. Even though the UK gives you a break, the US sees that income as fully reportable and taxable.
Keep in mind, the IRS will generally tax any income you make that hasn’t been taxed by HMRC.
For example, if you have a Cash Individual Savings Account and earn a few hundred pounds in interest, the IRS wants to know about it. Same thing if your investments inside a Stocks & Shares Individual Savings Account go up in value or pay dividends. You’ll need to report all of it when you file your US taxes. The earnings typically show up on things like Schedule B (for interest and dividends) and Schedule D (for capital gains).
Unfortunately, there’s no workaround or exemption for ISAs under the US tax code. It’s not fair, but it’s how the system works.
Reporting requirements: FBAR, FATCA (Form 8938), and PFIC
On top of the income tax stuff, Individual Savings Accounts can trigger some extra reporting requirements, and you definitely don’t want to ignore these.
First up is FBAR (that’s FinCEN Form 114). If the total value of all your non-US financial accounts goes over US$10,000 at any time during the year, you’ll need to file one. And yes, your ISA counts toward that total.
Then there’s FATCA Form 8938. This one’s filed with your US tax return and has higher thresholds, like US$200,000 for single expats or US$400,000 if you’re married filing jointly. It asks for a lot more detail than the FBAR, but you may need to file both depending on your situation.
PFICs… the big tax trap.
Let’s talk about PFICs (Passive Foreign Investment Companies). Sounds technical, but here’s the short version: if your ISA holds non-US mutual funds or ETFs, there’s a decent chance the IRS will classify those investments as PFICs. And once that happens, you’ve got extra forms to file (specifically Form 8621), and rough tax rules to swallow.
We’ve published detailed information on what defines a PFIC and you can read that here.
Because of all this, many US expats “in the know” avoid Stocks & Shares ISAs altogether unless they’re really careful about what goes in them. Cash ISAs are usually safer, since they don’t involve PFICs and don’t generate dividends or capital gains, just interest.
Is there a way to invest in a Stock ISA without triggering PFIC filing? Yes! Keep reading.
Should you open an ISA?
Our tax specialists can provide personalized advice.
Pros and cons of using an ISA as a US expat
On top of the income tax stuff, Individual Savings Accounts can trigger some extra reporting requirements, and you definitely don’t want to ignore these.
First up is FBAR (that’s FinCEN Form 114). If the total value of all your non-US financial accounts goes over US$10,000 at any time during the year, you’ll need to file one. And yes, your ISA counts toward that total.
Then there’s FATCA Form 8938. This one’s filed with your US tax return and has higher thresholds, like US$200,000 for single expats or US$400,000 if you’re married filing jointly. It asks for a lot more detail than the FBAR, but you may need to file both depending on your situation.
Another downside? PFIC rules. If you’re using a Stocks & Shares ISA and it holds non-US mutual funds (which most do), those investments can be treated as Passive Foreign Investment Companies by the IRS. PFICs are a headache, there’s extra paperwork, and the tax treatment is generally harsh.
Also, some UK providers might turn you away completely once they learn you’re a US citizen. They just don’t want the extra compliance hassle.
PFICs, can I have my cake and eat it too?
Yes, you can, but it takes work. It’s possible to invest in US-domiciled funds that are also approved by HMRC. Because they’re US-domiciled, they’re not “foreign” to the US which means no PFIC reporting. Because they’re approved by HMRC as an Offshore Fund, you get all the UK tax benefits too.
Here is a list of HMRC-approved US-domiciled funds here to keep you free from PFICs.
Roth IRA, UK, and US mixed portfolios
A Roth IRA is probably the closest US equivalent to an Individual Savings Account. It lets your investments grow tax-free, and you can withdraw that money tax-free in retirement if you follow the rules. Plus, the IRS actually treats Roth IRAs as real retirement accounts, which means less hassle compared to ISAs.
Roth IRAs don’t come with PFIC problems, and they don’t usually trigger FBAR or FATCA reporting if they’re held with a US institution. They’re cleaner and more tax-efficient for US citizens.
The catch? You can only contribute to a Roth IRA if you have US taxable earned income. If you’re excluding all of your foreign income using the Foreign Earned Income Exclusion, you might not be able to make any contributions at all unless you have some leftover taxable income.
That’s why a hybrid approach can sometimes make sense. Use an ISA for savings and short- or mid-term goals, and keep contributing to a Roth IRA if you’re eligible. You’re basically spreading your money across both systems, taking advantage of UK tax breaks where they work, while keeping your long-term savings US-friendly.
It’s not perfect, but it works for some US citizens.
FAQ'S
Can I transfer money from a UK Individual Savings Account to a US retirement account like a Roth IRA?
No, you can’t directly transfer money from a UK ISA to a US Roth IRA. They’re two different systems with different rules and aren’t compatible for rollover or transfer purposes.
You’ll need to withdraw the funds and then transfer them to a US Roth IRA, which will bring a set of tax reporting requirements.
Do I have to report a zero-interest Individual Savings Account on my US taxes?
Are Individual Savings Account contributions tax-deductible in the US?
Will closing an Individual Savings Account trigger US taxes?
Can I avoid PFIC rules by only holding cash in my Individual Savings Account?
