ISA for US citizens in the UK: how to make the most of your allowance

If you’re a US citizen living in the UK, investing can feel complicated. You’re often managing UK and US tax rules at the same time, which increases the risk of costly mistakes.

One of the questions we’re often asked is if someone from the US can or should invest using an ISA. The answer isn’t straight forward. Below, we explain how ISAs work, how the US taxes them, and when they might still be worth considering.

If you’re new to the topic, our US taxpayers in the UK FAQs provide a helpful overview.

What’s an ISA and how does it work in the UK?

An Individual Savings Account (ISA) is a UK tax efficient savings and investment wrapper available to UK residents.

Within an ISA:

• You don’t pay UK income tax on interest or dividends
• You don’t pay UK capital gains tax on investment growth
• You can withdraw money at any time without UK tax charges

There’s no tax relief when you contribute. Instead, you receive an annual allowance – currently £20,000 per tax year for a Stocks & Shares ISA. There’s no lifetime cap, so ISAs can grow over time.

For most UK residents, ISAs are one of the first places they save or invest.

Can US citizens in the UK use an ISA?

Yes – but the US doesn’t recognise ISAs as tax free accounts.

From a US tax perspective, an ISA is treated like a standard personal investment account. If you’re a US taxpayer, you must:

• Report ISA income and gains on your US tax return
• Include the account in annual FBAR reporting
• Avoid investments that fall under PFIC (Passive Foreign Investment Company) rules

This doesn’t stop US citizens from holding an ISA. But it does mean that many common ISA investments aren’t suitable for US taxpayers.

If ISAs are taxable in the US, why use one at all?

Even though the IRS taxes ISA returns, an ISA can still be useful in the right circumstances.

UK tax rates are often higher than US tax rates. In some cases, that difference can work in your favour.

UK vs US tax rate comparison

Dividends

• UK tax rates: 10.75% / 35.75% / 39.35%
• US tax rates: 0% / 15% / 20% (qualifying dividends)

Capital gains tax

• UK tax rates: 18% / 24%
• US tax rates: 0% / 15% / 20% (long‑term gains)

Source: HMRC (gov.uk), IRS (irs.gov)

Because UK tax is often higher, US taxpayers may build up foreign tax credits. These can sometimes offset US tax due on ISA income – and in some cases reduce it to zero.

Whether this works depends on your income, tax status and investment mix.

PFIC rules: the biggest risk for US expats using ISAs

Most ISAs are invested in UK funds or ETFs. For US taxpayers, these are usually treated as PFICs, which can lead to:

• Punitive US tax treatment
• Complex and expensive reporting
• Potential penalties

For most US citizens, these drawbacks outweigh any UK tax benefit. As a result, UK funds and ETFs are generally best avoided inside an ISA.

US domiciled funds and ETFs would normally solve this issue – but they can’t be held within an ISA.

This leaves more limited ISA friendly options for US taxpayers, including:

• Cash
• Individual bonds
• Individual shares

Because of the £20,000 annual allowance, it can take time to build a diversified portfolio using individual holdings alone. For this reason, an ISA often works best as part of a long-term, US compliant investment strategy, alongside non-ISA accounts.

First steps for US citizens considering an ISA

An ISA won’t be the right starting point for everyone.

For some US expats, a sensible approach is to:

1. Use a cash ISA initially
2. Allow balances to build
3. Move gradually into investments once it becomes efficient

From April 2027, the cash ISA allowance is expected to fall to £12,000 per year, making forward planning more important.

What if you already invested in funds within an ISA?

We often speak with US citizens who invested in an ISA before they were aware of PFIC rules.

If this applies to you, it’s important not to ignore it. Typical next steps include:

• Speaking with your US tax adviser about past reporting
• Take financial advice on moving to a US compliant structure

Addressing the issue early, usually gives you more options.

We’re here to help

ISAs can still play a role for US citizens living in the UK – but only when they’re used in the right way and within a wider financial plan.

While the tax benefits may look modest at first, lower US tax rates and the careful use of foreign tax credits can add up over time.

That said, ISAs aren’t suitable for everyone. Investing involves risk and should always be considered in the context of your full US‑UK financial picture.

If you’d like help deciding whether an ISA fits into your US expat investment strategy, our specialist planners can help.

Nathan Prior
Partner, Head of PWM International
nprior@partnerswealthmanagement.co.uk
020 7444 4053

The information in this article is provided for general guidance only and doesn’t constitute personal tax, legal or investment advice. UK and US tax rules are complex and subject to change, and their application will depend on your individual circumstances. Before taking any action, you should seek advice from a suitably qualified UK and US tax professional.