Guide
Form 8621: PFICs and non-US funds
Most UK funds, investment trusts and ISA holdings are PFICs to the IRS, taxed under a regime designed to be unattractive.
The reason your ISA is a problem.
A passive foreign investment company is, broadly, a non-US fund. The definition catches most UK unit trusts, OEICs, investment trusts and ETFs — including those held inside an ISA.
The default regime taxes gains and excess distributions at the highest ordinary rate with an interest charge for deferral, which is intended to remove any benefit from holding the fund at all.
At a glance
- Form
- Form 8621, generally one per fund per year
- Catches
- Most non-US pooled investments, including inside an ISA
- Default regime
- Excess distribution: highest ordinary rate plus an interest charge
- Alternatives
- QEF election, or mark-to-market where the fund is regularly traded
- Practical effect
- The ISA wrapper gives no US protection whatsoever
In detail
01
Why it is so punitive
The regime spreads a gain across your holding period, taxes each year at the top rate then, and adds interest for the deferral. The outcome routinely exceeds a straightforward capital gain.
02
The QEF election
Taxes you annually on your share of the fund's income and gain, which is usually far better — but it needs an annual information statement most UK funds do not produce.
03
Mark-to-market
Available for regularly traded funds. You recognise the annual change in value as ordinary income, which is simpler and often preferable to the default.
04
Practical answers
Many US taxpayers in the UK hold cash and individual shares rather than funds, or use US-domiciled funds. Where a fund is already held, the sequencing of any disposal matters.
Most UK funds, investment trusts and ISA holdings are PFICs to the IRS, taxed under a regime designed to be unattractive.
Frequently asked
Is my ISA itself a PFIC?
The ISA is a wrapper, not an investment. What matters is what sits inside it — cash generally is not a problem, funds usually are.
Do I file a form for every fund?
Generally one per fund per year, so a diversified portfolio of small holdings can produce a great deal of work relative to the amounts involved.
What about my UK pension's funds?
Funds held inside a pension are usually treated differently under the treaty. It is one of the areas where the pension analysis and the PFIC analysis interact.
This guide is general information, not advice for your circumstances. Cross-border tax turns on detail, and the right answer for someone with a similar situation may not be the right answer for you. Talk to us before acting on anything here.
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