# When are ISAs treated as PFICs?



## sueinwales

Rather than continuing tangentially on another recent thread, I thought it best to pose the question independently.
As a complete novice, I (perhaps foolishly) engaged a US/UK tax person to help me do a streamlined return a few years ago. I was told that as I had 'stocks and shares' ISAs these would need to be treated as PFICs.

But I am beginning to have my doubts. I guess the problem is that I am not sure what is really inside my ISAs, and, consequently, whether or not they need to be branded as PFICs. 

They are called:
Marlborough Special Sits P Acc
Vanguard UK Lng DurGlt Id 
Fidelity Index UK P 
Liontrust Spl Sits I Inc 

Views, anyone?


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## Nononymous

The answer to your question, unfortunately, seems to be "when an expensive US expat tax professional tells you they are."

I realize that this was not helpful. My apologies.


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## 255

sueinwales -- Unfortunately, all four of your holdings are funds (group investments,) so by default they are PFICs.

FYI, you could close all the positions and transfer the cash to another Stocks and Shares ISA (or Cash ISA) provider that would allow you to invest in individual stocks, with a cash savings account -- eliminating your U.S. PFICs reporting requirements. If you decide to do this, make a direct transfer and do not withdraw the money personally (or else you'll encounter UK tax consequences.) Alternately, you may be able to change the holdings of your current account -- check with your provider. That way, you would eliminate any PFIC reporting requirements, in the future.

Your US/UK tax person's advice: "I was told that as I had 'stocks and shares' ISAs these would need to be treated as PFICs." is only partially correct. Your Stock and Shares ISA contains PFICs, so yes you do need to report; but your requirement to report is due to the composition of your investment account, not by having a Stocks and Shares ISA.

I took a foreign investments tax class (close to 40 years ago now,) taught by a tax attorney and a CPA that specialized in clients with foreign investments. The two major take aways (for me) was not to invest in PFICs or CFCs. The tax reporting requirements were nuts. Good luck! Cheers, 255


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## Jca1

255 said:


> FYI, you could close all the positions and transfer the cash to another Stocks and Shares ISA (or Cash ISA) provider that would allow you to invest in individual stocks, with a cash savings account -- eliminating your U.S. PFICs reporting requirements. If you decide to do this, make a direct transfer and do not withdraw the money personally (or else you'll encounter UK tax consequences.)


This is just an aside, but ISAs are funded with post-tax money and withdrawals of both the contributions and growth are free of UK tax.


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## Jca1

sueinwales said:


> Rather than continuing tangentially on another recent thread, I thought it best to pose the question independently.
> As a complete novice, I (perhaps foolishly) engaged a US/UK tax person to help me do a streamlined return a few years ago. I was told that as I had 'stocks and shares' ISAs these would need to be treated as PFICs.
> 
> But I am beginning to have my doubts. I guess the problem is that I am not sure what is really inside my ISAs, and, consequently, whether or not they need to be branded as PFICs.
> 
> They are called:
> Marlborough Special Sits P Acc
> Vanguard UK Lng DurGlt Id
> Fidelity Index UK P
> Liontrust Spl Sits I Inc
> 
> Views, anyone?


As 255 said, these all appear to be funds, which the IRS and the US tax compliance industry treat as PFICs.

Not sure if any of the following helps.

There are a few exemptions to PFIC reporting (form 8621) but it's not easy to figure out whether anyone qualifies:



> (2) Exception if aggregate value of shareholder’s PFIC stock is $25,000 or less, or value of
> shareholder’s indirect PFIC stock is $5,000 or less.—
> 
> (i) General rule.—A shareholder is not
> required under section 1298(f) and these regulations to file Form 8621 (or successor form) with
> respect to a section 1291 fund (as defined in § 1.1291-1T(b)(2)(v)) for a shareholder’s taxable year
> if—
> 
> (A) On the last day of the shareholder’s taxable year,
> 
> (1) The value of all PFIC stock owned directly or indirectly under section
> 1298(a) and § 1.1291-1T(b)(8) by the shareholder is $25,000 or less; or
> 
> (2) The section 1291 fund stock is indirectly owned by the shareholder
> under section 1298(a)(2)(B) and § 1.1291-1T(b)(8)(ii)(B), and the value of the section 1291 fund
> stock indirectly owned by the shareholder is $5,000 or less;
> 
> (B) The shareholder is not treated as receiving an excess distribution (within
> the meaning of section 1291(b)) with respect to the section 1291 fund during the taxable year or as
> recognizing gain treated as an excess distribution under section 1291(a)(2) as the result of a
> disposition of the section 1291 fund during the taxable year; and
> 
> (C) An election under section 1295 has not been made to treat the section 1291
> fund as a qualified electing fund with respect to the shareholder.


I'm not a lawyer or accountant, but what this seems to be saying is that if you own less than $25000 in PFICs at the end of a tax year, and in the tax year you have not received a dividend from the PFICs or sold a PFIC resulting in a capital gain, you do not have to file form 8621. Strangely, in any case there does not seem to be a penalty for not filing form 8621, though I suppose not filing the form could make the tax return "incomplete," which can allow the IRS to extend the statute of limitations for an audit, and there could also be a penalty for not paying the additional tax computed by form 8621.

PFICs held in an account recognised as a pension by a US tax treaty are also exempt from form 8621 reporting; sadly, the ISA does not qualify.

My guess is some of these funds don't qualify for the exception due to paying dividends (this is called an "excess distribution" in PFIC-speak), but it might be worth a look. You can of course end your PFIC reporting obligations by selling the PFICs and re-investing in individual stocks, but that's a mess from a portfolio management perspective.


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## sueinwales

Ooh, the beloved 'excess distributions'! I finally got my head around these and complete the 8621 forms each year. Of recent years there have been no EDs. Would love to just ditch the ISAs now and reinvest but my understanding if i do this, is that all the gain made on the ISA at point of sale is treated as an excess distribution, and the purchases go back to 2013, so i am gathering i would lose most of the (significant) gain that i have made since then. Irritating doesn't begin to describe it! I had no idea about PFIC back in the day, and investing in ISAs seemed to be a logical way to use my lump sum upon retirement in 2012 (and onwards until it was used up). There were also no tricky questions about nationality at that time- I only had US nationality then but have since taken on UK.

Seriously considering renouncing. It's all becoming such a pain, and i can't imagine ever wanting to live in the US again.


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## Nononymous

Is "going dark" an option? Straight-up non-compliance, filing no further returns. I know you have some complex US family trust thing in the picture, but now that you're a UK citizen, there's essentially nothing the IRS can do to you.


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