ISAs, unit trusts and the PFIC problem.
The most expensive letters in expat tax are P-F-I-C. Nearly every UK fund, tracker and ETF is a Passive Foreign Investment Company to the IRS — including everything inside your ISA — and the default treatment is designed to hurt.
Figures on this page are stated for tax year 2025/26 UK · 2025 US. Thresholds change annually.
The wrapper is invisible to the IRS
US law doesn't recognise the ISA. Each fund inside is tested on its own, and a pooled non-US fund almost always fails the test. Gains then fall into the excess-distribution regime: sliced across your holding period, taxed at the top rate for each year, with interest charged on the 'late' tax.
Held long enough, the effective rate on a PFIC gain can exceed 50% — on an investment that would have been lightly taxed on either side alone.
- UK OEICs, unit trusts, investment trusts and most ETFs are PFICs
- Cash ISAs hold no funds, so no PFIC issue — but the interest is still US-taxable and the account still reportable
- Form 8621 required per fund, per year
There are exits, and they can be planned
A QEF election fixes the treatment where the fund publishes the right data (rare for UK retail funds); mark-to-market works for some listed holdings; and for many portfolios the honest answer is a planned purge — realise, pay the historic charge once, and rebuild in US-friendly, HMRC-reporting ETFs that both systems treat rationally.
The wrong move is doing nothing while the interest clock runs.
- QEF and mark-to-market elections, where available
- Purge-and-rebuild modelling: cost of leaving vs staying
- Compliant portfolio design for dual-system investors
Last reviewed · Figures stated for tax year 2025/26 UK · 2025 US. Thresholds and rates change annually — check figures against the current tax year before relying on them.
Holding UK funds as a US person?
Send us your holdings list. We will tell you which are PFICs, what the damage is, and the cheapest route out.