Why the ISA is the first thing we ask about

When someone who is a US taxpayer sits down with us for the first time, the ISA comes up before almost anything else. Not because it is the largest asset — it usually is not — but because it is the one most likely to have been set up in good faith, on good UK advice, with no idea that the other system would read it completely differently.

The UK sees a tax-free wrapper. The IRS sees nothing at all: the wrapper is invisible, and whatever sits inside it is taxed as though it were held in an ordinary account. For cash, that is merely untidy. For funds, it is a problem with its own acronym.

Most stocks-and-shares ISAs hold UK-domiciled funds — unit trusts, OEICs, investment trusts, ETFs. To the US these are passive foreign investment companies, and the default tax regime for a PFIC is designed to make holding one unattractive. Gains are spread back across the holding period, taxed at the highest ordinary rate for each year, and then charged interest for the deferral.

The result is routinely worse than an ordinary capital gain would have been, and it comes with a separate form for every fund, every year. A modest, sensibly diversified ISA can generate more reporting than the rest of the return combined.

Nobody did anything wrong here. A UK adviser recommending an ISA full of low-cost index funds is giving textbook advice. The US side was simply never in the room. This is the pattern behind most cross-border problems we see: two sets of advice, each correct, that were never reconciled.

It is also why we are uneasy about the phrase 'tax-efficient' in a cross-border context. Efficient in which system? The answer is usually one of them.

There are three realistic routes. Some people restructure: cash ISAs, or individual shares rather than funds, keep the UK benefit without the US penalty. Some people use US-domiciled funds where a platform allows it. Some people decide the ISA is not worth the reporting and close it, ideally before a US filing obligation begins rather than after.

The order matters. Disposing of a PFIC is itself a taxable event under the default regime, so a clear-out that would have been painless before arrival can be expensive a year later. If a move to the US is on the horizon, this is one of the first conversations to have.

If you are a US citizen or Green Card holder with a stocks-and-shares ISA, assume it needs looking at. If you are about to become one, look at it before the obligation starts. And if an adviser has told you it is tax-free, ask them which tax.