Should U.S. Expats Keep Their ISA Accounts? Here’s What You Need to Know

If you’re a U.S. citizen living in the U.K. or planning a move abroad, your Individual Savings Account (ISA) might not be the tax-friendly investment you once thought. While ISAs offer significant tax benefits to U.K. residents, those perks often disappear under U.S. tax law and may even create a tax burden.

At Expatriate Tax Returns, we help U.S. expats navigate complex cross-border tax rules so you can make informed financial decisions with clarity and confidence. Let’s break down what U.S. expats need to know about owning an ISA.

What Is an ISA, and Why Does the IRS Disagree?

In the U.K., ISAs are used to shelter savings and investments from local taxes. But here’s the catch—the IRS does not recognize the tax-free status of ISAs. This means any growth, interest, or dividends in your ISA must still be reported—and potentially taxed on your U.S. return.

Can I Keep My ISA?

Yes, but with limitations.

• While living in the U.K.: You can contribute to and maintain ISAs, but you must report the income and file additional forms with the IRS.
• After moving abroad (outside the U.K.): You cannot make new contributions or open new ISAs, though you may keep existing accounts open (if your provider allows it).

Unfortunately, the IRS treats these accounts as foreign investments, often resulting in complex paperwork and surprise tax liabilities.

Reporting Requirements: What You Might Owe

There are two types of ISAs, and both come with specific U.S. tax treatment:

Cash ISAs

• Treated like foreign bank accounts
• Interest must be reported as income
• May require FBAR and FATCA filings

Stocks and Shares ISAs

• Usually contain Passive Foreign Investment Companies (PFICs) like mutual funds and ETFs
• Require Form 8621, which involves complex and time-consuming calculations
• May also trigger Form 3520 if structured as a foreign trust

Penalties for missed forms can exceed $10,000 even if no tax is owed.

Why Many U.S. Expats Should Avoid ISAs

Although convenient for U.K. residents, ISAs often become tax traps for Americans abroad. Here’s why:

• No IRS recognition: Tax-free growth? Not in the eyes of the IRS.
• Increased complexity: You’ll deal with extra forms and potential penalties.
• Higher tax rates: Gains may be taxed as ordinary income under PFIC rules.
• No future contributions: Once you leave the U.K., you’re locked out.

What Happens If You Already Own an ISA?

Whether you’ve recently moved abroad or held an ISA for years, here’s what to do:

• Stop contributing immediately if you’re no longer a U.K. resident.
• Check with your provider to see if you can keep the account open.
• Plan for IRS reporting—even dormant accounts must be disclosed.
• Consider closing the ISA and reinvesting in U.S.-compliant accounts.

What Are Better Options for U.S. Expats?

We recommend tax-compliant alternatives like:

• U.S.-listed mutual funds and ETFs for simplified reporting
• Traditional or Roth IRAs (if you have U.S.-based income)
• Strategic use of the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)

These tools offer tax benefits without the compliance headaches that ISAs often bring.

How Expatriate Tax Returns Can Help

At Expatriate Tax Returns, Diane Siriani and our team of expat tax specialists handle the heavy lifting—so you don’t have to.

• Not sure if you need to file Form 3520 or 8621? We’ll figure it out.
• Behind on reporting? We can help you catch up with Streamlined Filing Procedures.
• Want to explore smarter tax strategies? We’ll help you structure your investments and income in a way that works on both sides of the Atlantic.

Ready for Peace of Mind?

If you have an ISA and you’re unsure about the U.S. tax consequences, now’s the time to act. Avoid costly mistakes and unnecessary penalties. Let our experts help you stay compliant while protecting your wealth.

U.S. expat taxes don’t have to be stressful. Let Expatriate Tax Returns make them simple.