Individual Savings Account for US citizens in the UK
Published on October 16, 2023
Updated on November 12, 2024
by Clark Stott
Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
Table of Contents
Can I open an individual savings account in the UK as a US expat?
Yes, you can open an Individual Savings Account (ISA), provided you meet the UK residency requirements. Because of their tax advantages, ISAs are appealing investment opportunities for UK residents.
However, the US does not recognize these accounts as tax-free. Therefore, it’s crucial to understand both US and UK tax laws and the nature of an ISA before opening an account to be aware of the tax implications and compliance requirements.
What is an ISA?
Individual Savings Accounts (ISAs) are a type of account available in the UK that offers attractive tax advantages for UK residents. You put money into an ISA with a UK bank, and the interest or returns you earn are either tax-free or taxed at a much lower rate.
Is an ISA a good thing for US Citizens?
It depends on the type of ISA chosen. Cash ISAs are generally a better choice if the banks pay reasonable interest rates. Interest earned on the balance is generally tax-free in the UK but likely won’t be on the US tax return.
Stock ISAs are generally bad news for anyone that holds US citizenship or a Green Card. The US tax implications are harsh and tax compliance requirements are detailed and complex.
If a person has specialized knowledge of investments, they can consider a stocks and shares ISA, but they must acquire complete knowledge of the US tax repercussions before investing in any type of fund.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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What are the different kinds of ISAs offered?
These are the most common types of ISAs available:
- Cash ISA: Cash contribution to an account that grows tax-free in the UK.
- Stocks and shares ISA: Account that allows investment in shares, stocks, bonds, and ETFs to grow passive income.
- Lifetime ISA: This account is for individuals aged 18 to 39. It offers tax-free withdrawals for retirement or first-time home purchases, along with a 25% government bonus on top of initial deposits.
- Junior ISA: Ideal for adults who want to teach their children or grandchildren about saving. At age 16, the child can take control of the account, and they can start making withdrawals once they turn 18.
How much can I put in an ISA?
You can contribute up to £20,000 in total across all types of ISAs. This means you have the flexibility to split this allowance among different ISAs, but the combined total contributions cannot exceed £20,000.
For Lifetime ISA, there is a contribution limit of £4,000 per year as part of the £20,000 limit and for Junior ISA a limit of £9,000 per year is allowed, but this is separate from your £20,000 adult ISA limit.
Does a stocks and shares ISA have capital gains tax?
In the UK, stocks and shares ISAs enjoy tax-free growth, so capital gains and other interest or dividends earned within the ISA are exempt from UK taxes during the growth period.
However, the US IRS does not recognize the tax-free status of ISAs, so capital gains and other income earned within these accounts may be taxable in the US.
This disparity creates a potential tax liability and complex reporting requirements for U.S. citizens and residents.
Is the lifetime ISA only for retirement or first home purchase?
Typically, there is a 25% withdrawal penalty for withdrawing funds before age 60 and not for the reason of purchasing your first home. This penalty reduces the government bonus and some of your initial contributions.
How are ISAs treated under US tax law?
Generally, any income generated on the growth of the fund would not be exempt from US tax law since the US taxes individuals on their worldwide income.
While the investment may grow tax-free in the UK, the US does not necessarily recognize this tax-free status, even under the US-UK DTA tax treaty, and since the ISA is not classified as a pension account, it does not receive the same tax treatment as a pension.
Can I have more than one ISA?
Absolutely, you can open a new ISA each tax year if you want, but remember, you can’t exceed that annual £20,000 limit across all your accounts. So, if you’re the kind of person who likes to diversify, ISAs have got you covered.
How do I open an ISA?
Here are the steps to follow:
- Determine your eligibility: You must be a UK resident or meet the UK residency requirement.
- Choose the type of ISA: The ideal ISA for US citizens would be a Cash ISA, but you can decide which kind suits your financial goals.
- Select an ISA provider: Such as banks, building societies, credit unions, or online investment platforms. Consider looking at factors like interest rates, investment options, fees, and account flexibility.
- Apply for an ISA: Prepare the requirements and apply online, in-person, or over the phone, depending on the provider. Most applications are completed quickly.
- Fund your ISA: You can fund your ISA with a lump sum or make regular contributions. You can also transfer existing ISAs from other providers.
- Manage and monitor your ISA: You can continue to manage your ISA online or through your provider. Track your contributions to ensure you don’t exceed the annual limit.
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