ISAs, UK pensions and PFICs: the US tax traps waiting for Brits in New York

The moment you become US tax resident, the IRS looks at your UK savings as if the UK's tax breaks didn't exist, and some of your ordinary funds become a tax headache.

The short version

• ISAs aren't recognised by the IRS. Interest, dividends and gains inside an ISA are taxable in the US once you're US resident, even though the UK still treats the ISA as tax-free [1].
• Most UK funds and ETFs are PFICs (passive foreign investment companies). Without an election, gains are taxed at the top income tax rate plus an interest charge, and each fund needs its own Form 8621 [2].
• UK pensions get better treatment under the UK–US tax treaty: growth inside a recognised UK pension generally isn't taxed in the US year by year. How withdrawals are taxed is more nuanced [3].
• Reporting: UK accounts worth more than USD 10,000 in total at any point in the year need an FBAR. Larger totals also need Form 8938 with your tax return [4].
• Never move a pension because of this guide. Any pension transfer needs regulated financial advice.

When the IRS starts caring

You become a US tax resident by holding a green card or by passing the "substantial presence" test, which counts the days you spend in the US. Most people on an L-1, H-1B or E-2 who move to New York full-time will be resident from their first year or close to it. From then on, the US taxes your worldwide income, and New York State and New York City usually follow the federal figures. Our guide to US taxes for Brits covers the residence tests and the first-year choices. Even the FCDO's "Living in the USA" guide suggests getting professional advice on US tax [7].

The UK side doesn't disappear either. Tell HMRC you're leaving with form P85, and check whether split-year treatment applies to the year you go. Your UK accounts carry on existing; it's the US that now wants to know about them.

Pound conversions use the Bank of England spot rate of 5 November 2026 (£1 = USD 1.35).

ISAs: tax-free at home, taxable in New York

GOV.UK is clear that you can keep your ISA when you move abroad and it still gets UK tax relief, but you can't pay into it once you're no longer UK resident [1]. What GOV.UK doesn't say is what the new country does. In the US, the answer is: it taxes it.

The UK–US treaty doesn't mention ISAs, so the IRS sees:

• A cash ISA as an ordinary foreign bank account. The interest goes on your US return each year.
• A stocks and shares ISA as an ordinary foreign brokerage account. Dividends and gains are taxable. If it holds UK funds or ETFs, the PFIC rules below apply too, which is usually the bigger problem.
• A Lifetime ISA the same way. The 25% government bonus may also be taxable income in the US.

The ISA wrapper also doesn't stop the accounts counting for FBAR and Form 8938.

What do Brits typically do? Many decide before they move. Cash ISAs are fairly simple to keep and report. Stocks and shares ISAs full of UK funds are the ones that cause pain. Selling before you become US resident can avoid PFIC history building up, but it also means losing the ISA wrapper for good, as you can't refill it from abroad. That's a decision for you and a tax adviser who knows both countries, not a rule of thumb. Our guide to ISAs when you move abroad covers the UK side.

PFICs: why your UK funds become a problem

A foreign company is a PFIC if at least 75% of its income is passive, or at least 50% of its assets produce passive income [2]. Almost every UK-domiciled unit trust, OEIC, investment trust and ETF meets that test. Your global tracker from a big UK provider is, to the IRS, a PFIC.

How PFICs are taxed

The IRS instructions for Form 8621 set out three ways a PFIC can be taxed [2]:

There's no lower long-term capital gains rate under the default regime. That's the sting: what would be a 15% or 20% gain on a US fund can be taxed at the top ordinary rate plus interest.

Form 8621

Each PFIC generally needs its own Form 8621 with your tax return [2]. There's a de minimis exception for some years: if your total PFIC holdings are worth USD 25,000 (about £18,550) or less at year end, or USD 50,000 (about £37,100) on a joint return, you don't need to complete the annual information part, unless you've sold or received an excess distribution [2]. Ten UK funds can mean ten forms. Accountants charge accordingly.

What many Brits do instead is hold US-domiciled funds once they're US resident. A US broker may not open an account for you until you have a US address and a Social Security number, so plan the timing. If your partner is American, our sister site ExpatStateside has a fuller explainer on why foreign funds hurt Americans.

UK pensions under the treaty

Here the news is better. The UK–US double taxation convention of 2001, amended by the 2002 protocol and in force since 2003, has specific rules for pensions [3]:

• Growth inside the pension: for a UK pension scheme recognised under the treaty, such as a workplace pension, a personal pension or, in many cases, a SIPP, income and growth inside the scheme generally isn't taxed in the US until you take money out.
• Contributions: if you were already in a UK workplace scheme before moving, there can be US relief for continuing contributions, within limits. If you're posted by a UK employer, ask HR how your scheme is treated.
• Withdrawals: pension income paid to a US resident is generally taxable in the US, not the UK. The treaty also has a rule aimed at tax-free lump sums, but advisers differ on how the 25% UK tax-free lump sum should be treated in the US. Get proper advice before you draw it.
• The UK State Pension is a social security benefit. Under the treaty it's taxable only in the UK, even if you live in New York. Our guide to the UK State Pension and US Social Security explains how it fits with US benefits.

Pensions also count for FBAR reporting in many cases, and some advisers file Form 8938 for them. A SIPP holding funds raises the question of whether PFIC rules apply inside it; many advisers take the view that treaty protection covers it, but that's for your adviser to confirm for you.

Don't transfer in a hurry

You may be pitched the idea of moving your UK pension somewhere "more tax-efficient". Be very careful. A transfer to an overseas scheme must go to a QROPS, and you'll pay a 25% overseas transfer charge on the whole amount unless you're exempt, or at least 40% tax if the scheme isn't a QROPS at all [5]. US tax on the transfer is a further question. Any transfer needs regulated financial advice, and the FCA's pension scam warnings are worth reading first [6]. Our guide to UK workplace and private pensions abroad has the full set of warnings.

FBAR and FATCA: the reporting

Even where no tax is due, the US wants a list of your foreign accounts. There are two separate reports, and the IRS's own comparison is the best summary [4]:

What counts: current accounts, savings accounts, ISAs, Premium Bonds, brokerage accounts and, in many cases, pensions. Joint accounts with a partner back home count. Accounts you can sign on, such as a parent's account you manage under a power of attorney, can count too.

UK banks also report US-resident customers to HMRC, which passes the information to the IRS under FATCA. Expect your UK bank to ask for a US tax number once you update your address.

If you've already missed a year

It happens a lot. Don't panic, and don't ignore it. The IRS has procedures for people who didn't know they had to report, which usually come with far lower penalties than being found out. A tax adviser who knows both countries can check which applies.

Our community group for Brits in the US is a good place to compare notes on which accountants actually understand ISAs: join here.

Sources

1. GOV.UK: Individual Savings Accounts (ISAs) – if you move abroad
2. IRS: Instructions for Form 8621 (revised December 2025)
3. GOV.UK (HMRC): USA tax treaties – the 2001 UK–USA double taxation convention as amended by the 2002 protocol
4. IRS: Comparison of Form 8938 and FBAR requirements (reviewed 19 September 2026)
5. GOV.UK: Transferring your pension – transferring to an overseas pension scheme
6. FCA: Pension scams
7. GOV.UK (FCDO): Living in the USA (updated 11 December 2025)

Keep reading

• US taxes for Brits
• The UK State Pension and US Social Security
• ISAs when you move abroad
• Double taxation agreements and reliefs