# ISA questions from a US citizen with a British wife



## perthyank (Feb 12, 2011)

I am a US citizen and my wife is a UK citizen. We have been living in the UK for nearly 3 years now. I have a National Insurance number and pay all relevant taxes here in the UK. I have not qualified as "ordinarily resident" in the UK until this tax year 2010/11.

All of my retirement savings / investment accounts are US-based. I'm realising that there is a considerable chance that we may settle in the UK, so am now considering the prudence of opening up some UK-based investment accounts.

First place I've looked of course is a Stocks & Shares ISA. With its tax-protected status and a current £10,200 annual limit on deposits for 2010-11 (the USA equivalent tax-protected investment vehicle has annual limit of only $5,000!!!), the ISA looks like a very good deal!

But here's where it gets tricky:

To contribute to an ISA you have to be a UK resident and ordinarily resident. As stated above I will qualify for tax year 10/11.

There is a 99% chance we will be moving to Australia not long after April 5, 2011.

First question(s): Given that we have left AFTER April 5, 2011, what (if any) contribution can be made to an ISA during tax year 11/12? Can I legally contribute the entire limit, say, if I make the full deposit before I leave the UK? Can I legally contribute the entire limit throughout the tax year 11/12 (i.e. from both the UK and Australia) simply because I WAS resident in the UK for a time period AFTER April 5 2011? Or can I legally not contribute anything at all, simply because I will not qualify as a UK resident for tax year 11/12?

Second question: I mentioned initially that my wife is a UK citizen. Will the answers to any of the questions asked in above paragraph be different if the ISA were in my wife's name? (My wife and I will be moving to Australia at the same time).

Third question(s): US TAX CONCERNS. Considering that I will be filing my US tax return "married filing jointly", what kind of tax involvement will the IRS have if:

the ISA is in my name?
the ISA is in my wife's name (but is funded through my income)?
the ISA is in both our names (not sure if that is even possible?)?

Fourth question: Would the answers to the above change if I elected to file my US tax return "married filing separately"?

Thanking you all in advance!


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## Joppa (Sep 7, 2009)

perthyank said:


> I am a US citizen and my wife is a UK citizen. We have been living in the UK for nearly 3 years now. I have a National Insurance number and pay all relevant taxes here in the UK. I have not qualified as "ordinarily resident" in the UK until this tax year 2010/11.
> 
> All of my retirement savings / investment accounts are US-based. I'm realising that there is a considerable chance that we may settle in the UK, so am now considering the prudence of opening up some UK-based investment accounts.
> 
> ...


I will let Bev answer your question regarding US tax treatment.

As soon as you become ordinarily resident in UK, you can open a cash ISA and/or stocks and shares ISA, and while you are still a UK resident you can contribute the maximum amount allowed. When you leave UK and become non-UK resident, you cannot make any further contribution to your existing ISA, nor can you open any new ISAs. Your existing ISA investment will continue with all the UK tax advantages, until you return to UK and become a UK resident again, when you can start putting money into it or open new ones. Or while you are still abroad you can close your ISA and cash in, tax-free. If you do that, you may become liable to Australian (and US) tax, so you need to investigate that.
The situation is exactly the same for your wife. Each of you have yearly ISA allowance, and ISAs can only be opened in a single name, not joint.

In answer to your specific questions:
1. You can contribute the maximum amount allowed for 2011-12 tax year *before* you leave UK, but cannot make any contributions after you leave.

2. Situation is exactly the same, as I've noted. Nationality doesn't come into it - only residence.

3. Hope Bev will answer that!


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## Bevdeforges (Nov 16, 2007)

perthyank said:


> Third question(s): US TAX CONCERNS. Considering that I will be filing my US tax return "married filing jointly", what kind of tax involvement will the IRS have if:
> 
> the ISA is in my name?
> the ISA is in my wife's name (but is funded through my income)?
> ...


Why on earth are you filing jointly unless your wife has significant income from the US? If you file jointly you must declare all of her income as well as your own (and pay taxes on it). By filing jointly, you are choosing to have her treated as a US resident (which she isn't) and to quote from Publication 54 "neither of you can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect."

But to answer the questions you asked, an ISA isn't recognized by the IRS for tax purposes. You won't be able to deduct any contributions to the ISA. (Even if it were recognized as an IRA, you can only deduct contributions against taxable US income.) The ultimate pension resulting from the ISA is reportable to the US, but as a pension, will wind up being taxed only by the UK (unless the tax treaty terms change by the time you start drawing down the fund). The fund itself needs to be reported on the Treasury form (where you report bank accounts and other "financial instruments" held overseas).

If the fund is in your wife's name and you're filing separately, obviously there is no need to report anything to the IRS. If it's in joint names, you'd have to report it on the Treasury form because you would have "signature authority" at a minimum and a "financial interest" in the fund as defined by the Treasury department.
Cheers,
Bev


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## perthyank (Feb 12, 2011)

Bevdeforges said:


> Why on earth are you filing jointly unless your wife has significant income from the US? If you file jointly you must declare all of her income as well as your own (and pay taxes on it). By filing jointly, you are choosing to have her treated as a US resident (which she isn't) and to quote from Publication 54 "neither of you can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect."
> 
> But to answer the questions you asked, an ISA isn't recognized by the IRS for tax purposes. You won't be able to deduct any contributions to the ISA. (Even if it were recognized as an IRA, you can only deduct contributions against taxable US income.) The ultimate pension resulting from the ISA is reportable to the US, but as a pension, will wind up being taxed only by the UK (unless the tax treaty terms change by the time you start drawing down the fund). The fund itself needs to be reported on the Treasury form (where you report bank accounts and other "financial instruments" held overseas).
> 
> ...


Okay thanks Bev. See my response to your post in the other thread regarding why I filed married filing jointly. If I wasn't responding via blackberry I'd copy and paste it. Hopefully that makes sense? Either that or I am firing my accountant!

Yeah I am not so worried about whether contributions to an ISA are tax deductible. I am more worried about whether I have to report anything other than "yes it exists" to the IRS once it exceeds $10,000. I.e. If I receive dividends and capital gains within the ISA, I know I don't have to report that to the HMRC, but do I have to report these annually to the IRS?

Also, you indicated that once I take distributions on the ISA it will wind up being taxed by the UK. How so? I thought that an ISA was like a Roth in that it is tax-free when you take distributions?

So correct me if I am wrong but to make this as simple as possible and to keep the IRS out of it, the account should be in my wife's name and I should file MFS? I'm sure there are long-term implications to both decisions, but for short-term ease, that's the way to do it.

Many thanks!


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## Bevdeforges (Nov 16, 2007)

perthyank said:


> Okay thanks Bev. See my response to your post in the other thread regarding why I filed married filing jointly. If I wasn't responding via blackberry I'd copy and paste it. Hopefully that makes sense? Either that or I am firing my accountant!
> 
> Yeah I am not so worried about whether contributions to an ISA are tax deductible. I am more worried about whether I have to report anything other than "yes it exists" to the IRS once it exceeds $10,000. I.e. If I receive dividends and capital gains within the ISA, I know I don't have to report that to the HMRC, but do I have to report these annually to the IRS?
> 
> ...


Yup, saw your other response - and replied to it over there. There are lots of factors that could have been involved in the accountant's decision to file jointly. (And there is the ever popular "taking an aggressive tax stance" - I worked for one of the big accounting firms once - basically whatever they think you can get away with. And they're usually right.)

One basic principle under the tax treaties is that "pensions" (at least those related to retirement) are ultimately taxed by the country of origin. I don't know enough (actually "anything") about the ISA funds in the UK to have many details, but that's the theory. It's the UK's to tax - whether they choose to or not. The precise mechanism for "exempting" it from US taxes is going to depend on the tax law when you get around to making withdrawals - but because you can't deduct the contributions on your US return, they've effectively already been taxed. It's only the gains that are open to question, and I'm relatively certain there must be some way to handle that. However, tax law could change by the time it becomes an issue.
Cheers,
Bev


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## 90199 (Mar 21, 2010)

If I were you I would seek independent professional financial advice.

For many years, I have a financial adviser for investments, the return for last year was almost 15% and I have had years in the past where it has been far more,

Hepa


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## usinuk (Mar 15, 2011)

*usinuk*

I think you are talking at cross purposes here. An ISA is a UK tax free saving/investing package. It means Individual Savings Account. It is not a pension, it has nothing to do with retirement. You can take money out of and ISA at anytime without any tax or penalty. You can put money into an ISA when you are 20 and take it all out when you are 21. Perthyank made one misleading/inaccurate statement when he said “ the USA equivalent tax-protected investment vehicle has annual limit of only $5,000” What is being referred to is a US Roth IRA which is a pension plan. I have said the same thing to people as an ISA is more like a Roth than any other US savings package in that your appreciation is tax free and you contribute after tax assets to it, but an ISA is not the same as a Roth in that it is not a pension plan so I don’t believe that any tax rulings relating to pensions have any place in this discussion. I don’t know the answer to how an ISA is treated for US tax purposes and would, as Perthyank, be interested in hearing from anyone who does.


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## Andrew James (Nov 6, 2010)

Hi,

As the above poster has mentioned, ISAs are not pensions but investment vehicles. They are PFICs under US tax law, whatever gains are derived within the ISA are taxed as an ordinary dividend to you on the your US, whether distributed or not and you cannot make a QEF election.

In Australia, it is a FIF but likely to get an exemption due to the size of the fund.

The point to note is that, generally speaking, something which is tax efficient in one jurisdiction likely isn't in any other. So, as a US taxpayer...sorry!

By the way, to clear any confusion, you don't get a tax deduction for a ROTH IRA in the US.

Best,

Andrew


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## Andrew James (Nov 6, 2010)

Bevdeforges said:


> Yup, saw your other response - and replied to it over there. There are lots of factors that could have been involved in the accountant's decision to file jointly. (And there is the ever popular "taking an aggressive tax stance" - I worked for one of the big accounting firms once - basically whatever they think you can get away with. And they're usually right.)
> 
> One basic principle under the tax treaties is that "pensions" (at least those related to retirement) are ultimately taxed by the country of origin. I don't know enough (actually "anything") about the ISA funds in the UK to have many details, but that's the theory. It's the UK's to tax - whether they choose to or not. The precise mechanism for "exempting" it from US taxes is going to depend on the tax law when you get around to making withdrawals - but because you can't deduct the contributions on your US return, they've effectively already been taxed. It's only the gains that are open to question, and I'm relatively certain there must be some way to handle that. However, tax law could change by the time it becomes an issue.
> Cheers,
> Bev


Hi,

Hypothetically, if it was a pension, then you are right that you can look to the DTA and in this case the UK would have primary taxing rights but the US would still tax it due to the savings clause.

Best,

Andrew


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## SteveOdem (Jan 23, 2012)

perthyank said:


> I am a US citizen and my wife is a UK citizen. We have been living in the UK for nearly 3 years now. I have a National Insurance number and pay all relevant taxes here in the UK. I have not qualified as "ordinarily resident" in the UK until this tax year 2010/11.
> 
> All of my retirement savings / investment accounts are US-based. I'm realising that there is a considerable chance that we may settle in the UK, so am now considering the prudence of opening up some UK-based investment accounts.
> 
> ...



I see 3 primary elements here:

US tax purposes – 
Importantly, a US citizen must continue to file Form 1040 based on world-wide income, subject to credits, deductions, exemptions, and so on, regardless of residence. 

Further, he may continue to file jointly with a non-citizen, non-resident wife, not declaring her income, based on an annual election UNLESS she has US income.

It may, theoretically, be possible for an ISA sponsor (i.e., bank) to get such a plan approved as a US IRA, but I’ve never heard of it actually being done.

I agree with Andrew that ISA is a PFIC. 

IRS forms that are likely appropriate, in addition to 1040 and others, include:
- Form 3520
- Form 3520A
- Form 8621
- Form 8938 (new form – applicability to the poster is uncertain at this time)
- Form TD F 90-22.1 (due June 30, no extension, penalties are obscene, but no tax. Applies to the aggregate – TOTAL – of all foreign accounts of any kind – bank, stock, mutual fund, insurance cash value)

Foreign insurance policies are also reportable and subject to tax. I would have to look up the form. PITA.

I suspect there may be some treaty-based positions in all this, which would require disclosure on Form 8833. 

Further, there may be either foreign earned income credit (Form 2555) or foreign tax credit for taxes paid in other countries including taxes withheld from interest (Form 1118).

In general, to elaborate on Joppa’s comment, once threshold citizenship requirements are met (i.e., US citizen must report global income), citizenship itself is rarely relevant to taxes but residency is grounds for most tax treatments such as treaty benefits.

Interaction – Based on UK law and relevant international agreements, there may be benefits associated with a Qualifying Recognised Overseas Pension Schemes (QROPS). Briefly, ISAs may roll to/from QROPS plans in other countries. Australia has a long list of super plans that are eligible. US has a very short list of IRA’s, 401(k), SEP and annuities that are eligible (no ROTH at this time). SEE chapter 14 of the UK Registered Pension Schemes Manual Technical Pages.

NOTE: I do not believe that ISA’s are a pension plan under the US-UK treaty, but the QROPS presents tax planning opportunities.

As for making ISA contributions in his wife’s name, I don’t see any US problem with that. If it’s in his name, both the contribution and income are reportable – see above. If This is equally true for Australian SUPER contributions.

Going forward - Given Perthyank’s intent to move to Australia (I’ve lived in Sydney & Brisbane, never got to Perth), the US and Australian tax treatment and present economy, having diversified investments is typically a good thing, so leaving some in US and UK would be consistent with diversification. Going forward I would concentrate on the Australian SUPER.

Cheers, mate ! ! !


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