ISA reporting for US expats in the UK: What the IRS requires

Written by  Reid Kopald, EA. Tax Manager

Last updated May 15, 2026

The UK exempts ISA income and capital gains from UK income tax and capital gains tax under UK law. The US-UK Double Taxation Agreement, signed on 24 July 2001 and in force on 31 March 2003, contains no provision exempting ISA income from US taxation. For the 2025 tax year filed in 2026, a US citizen or green card holder in the UK must report ISA income to the IRS annually and may need Form 8621 for investment funds held inside a Stocks & Shares ISA.

The following table summarises US tax treatment for each of the 5 ISA categories covered here – all 5 categories require FBAR reporting if the $10,000 aggregate foreign account balance threshold is met at any point during the calendar year.

For UK purposes, HMRC treats ISA income as tax-free ISA savings, and the UK government ISA rules and allowances confirm the annual subscription limit. For US purposes, the US-UK Double Taxation Agreement does not give an American expat ISA the same protection as a UK-registered pension. You can review our US expat taxes in the UK guide for 2026 for a broader UK filing context.

What is a UK ISA account?

A UK Individual Savings Account ISA is a government-registered savings or investment account that shelters interest, dividends, and capital gains from UK taxation. UK residents can contribute up to £20,000 per tax year for both 2025/26 and 2026/27. That ISA tax-free treatment does not extend to US citizens under the US-UK tax treaty.

The following 4 adult ISA types, plus Junior ISAs for children, are relevant to US expat families. Each account type can trigger different US income reporting and foreign account disclosure rules:

• Cash ISA: A deposit account earning interest, usually held at a UK bank or building society.
• Stocks & Shares ISA: An investment account holding equities, funds, OEICs, ETFs, investment trusts, or bonds.
• Lifetime ISA (LISA): A first-home or retirement savings account; the maximum contribution is £4,000 per year, HMRC adds a 25% government bonus, and new accounts are available to UK residents aged 18–39 under the Lifetime ISA rules.
• Innovative Finance ISA (IFISA): A peer-to-peer lending account that generally produces interest income.
• Junior ISA (JISA): A long-term account for children under 18, with a £9,000 annual contribution limit for 2025/26 and 2026/27.

The UK-US DTA Articles 17 and 18 address pensions and pension schemes, not ISAs. ISAs are savings or investment accounts, not pension accounts, so there is no equivalent treaty protection for ISA taxation on a US return.

So, how do ISA savings accounts work for Americans? The UK wrapper removes UK tax, but the IRS looks through the wrapper and taxes the underlying income type. That means income from ISA taxable items – interest, dividends, gains, and PFIC inclusions – still belongs on Form 1040.

How the IRS taxes each ISA type

The IRS taxes ISA income at the same rates that apply to equivalent domestic income; the ISA wrapper provides no US tax shelter. A US citizen in the UK must include ISA interest, dividends, capital gains, and PFIC inclusions on Form 1040 for the 2025 tax year, regardless of whether funds are withdrawn from the ISA.

Cash ISA

Cash ISA interest is taxable as ordinary income on the US return at marginal federal rates of 10–37% for the 2025 tax year filed in 2026. The ISA wrapper does not defer, exclude, or reduce US tax liability, even when the UK treats the same interest as tax-free.

The following 4 Cash ISA reporting rules usually matter for a US expat ISA:

• FBAR (FinCEN Form 114) is required if the aggregate balance of all foreign accounts exceeds $10,000 at any single point during the calendar year.
• Form 8938 is required for single filers abroad if total specified foreign financial assets exceed $200,000 at year-end or $300,000 at any point during the year.
• Cash ISA interest is reported on Schedule B (Form 1040) as foreign interest income.
• For deadlines and electronic filing rules, see our guide to FBAR filing requirements and deadlines for 2026.

Based on our client scenario at TFX: a US expat earns £500 of interest in a Cash ISA during 2025. At a representative GBP/USD exchange rate of 1.26, the taxpayer reports $630 on Schedule B as foreign interest income, fully taxable at their marginal US rate.

Can a US expat use cash ISA? Yes, a US expat can use a Cash ISA under UK rules if they are UK resident and the ISA provider accepts them, but it is not a US tax-free account. The main benefit is UK tax relief; the US still requires income tax on ISA interest and possible FBAR or FATCA ISA reporting.

Stocks & Shares ISA

A Stocks & Shares ISA holding UK, Irish, or Luxembourg-domiciled funds usually creates Passive Foreign Investment Company (PFIC) exposure for US holders. Form 8621 is generally required per PFIC fund when there is a distribution, disposition, PFIC election, or annual reporting obligation; narrow small-holder exceptions do not make expat stocks and shares ISA reporting safe to ignore.

The following 4 PFIC classification rules apply before choosing a tax method:

• PFIC income test: under IRC Section 1297(a)(1), a foreign corporation is a PFIC if 75% or more of its gross income is passive.
• PFIC asset test: under IRC Section 1297(a)(2), a foreign corporation is a PFIC if 50% or more of its assets produce passive income.
• UK-domiciled OEICs, unit trusts, and ETFs with ISIN prefixes GB, IE, or LU should be treated as PFICs until reviewed and confirmed otherwise.
• US-listed ETFs with an ISIN prefix US are not foreign corporations, so they are generally not PFICs even if held inside an ISA account USA reporting structure.

The following 3 PFIC taxation methods appear most often for Stocks & Shares ISA holders:

1. Default excess distribution method: Gains and excess distributions are taxed under IRC Section 1291, with allocations to prior years and interest charges. For 2025, the top ordinary federal income tax rate is 37%.
2. QEF election: A qualified electing fund election requires a PFIC Annual Information Statement from the fund each year. In TFX practice, very few UK-domiciled funds provide this, so QEF election treatment is often unavailable.
3. Mark-to-market election: A mark-to-market election under IRC Section 1296 recognizes annual changes in fair market value for marketable PFIC stock as ordinary income or limited ordinary loss.

Use the IRS Form 8621 official page and the IRS Instructions for Form 8621 to confirm filing triggers. We explain the mechanics, and clients with multiple funds can use our PFIC filing services for Form 8621.

Failing to file Form 8621 can keep the IRS assessment period open under IRC Section 6501(c)(8) until complete information is provided. If the failure was not due to reasonable cause, the open period can apply to the entire Form 1040, not only the PFIC item.

Lifetime ISA

A Lifetime ISA provides a 25% government bonus on contributions up to £4,000 per year, but neither the bonus nor the income sheltered inside the LISA is exempt from US taxation. Lifetime ISA expat reporting depends on whether the account holds cash, shares, or PFIC funds.

The following 3 lifetime ISA rules for expats matter on a 2025 US return:

• LISA income, including interest, dividends, capital gains, and PFIC inclusions, is taxable in the year earned even if the holder does not withdraw funds.
• HMRC normally charges a 25% Lifetime ISA withdrawal charge when funds are withdrawn for a reason other than a qualifying first-home purchase, age 60 or later, or terminal illness. The IRS does not automatically treat that UK charge as reducing US taxable income.
• The US-UK DTA does not classify a LISA as a pension, and a LISA is not a qualified retirement plan under IRC Section 401(a).

So, what is the life ISA expat issue? The UK adds a 25% bonus, but the IRS does not treat the account as a Roth IRA, UK pension, or tax-free ISA equivalent. If the LISA holds non-US funds, Form 8621 can apply in addition to FBAR and Form 8938.

Innovative Finance ISA and Junior ISA

An Innovative Finance ISA generates P2P interest income taxable as ordinary income on the US return at marginal rates of 10–37% for 2025. A Junior ISA held for or by a US-person child may require FBAR, Form 8938, and Form 8615 kiddie tax reporting under IRC Section 1(g).

The following 3 reporting points separate IFISA and Junior ISA expat treatment:

• IFISA interest is reported as ordinary interest income on Form 1040. The IRC Section 871(h) portfolio interest exclusion is a nonresident-alien withholding rule; it does not exempt US citizens from tax on expat ISA savings.
• If a US-citizen parent has signatory authority over a child’s JISA, the parent may need to report the account on FBAR if the $10,000 aggregate foreign-account threshold is met.
• If the child is a US person, the child’s JISA income may be taxed at the parent’s marginal rate on Form 8615 when the 2025 unearned income exceeds $2,700, and the age/support rules apply.

The JISA annual contribution limit is £9,000 for both 2025/26 and 2026/27. For an ISA for expats UK families hold in a child’s name, ownership, signatory authority, and the child’s US status all affect which forms to file.

PFIC rules and Form 8621: Step-by-step guide

Any US person holding a Stocks & Shares ISA that contains foreign-domiciled funds must evaluate Form 8621 separately for each PFIC. Under IRC Section 6501(c)(8), a missing Form 8621 can keep the assessment period open until complete information is filed, and in some cases, the entire 2025 Form 1040 remains open.

The following 3-step process covers how to identify PFIC holdings, choose a taxation method, and calculate the annual reporting obligation:

Step 1 – Identify PFIC holdings

The following 3 indicators determine whether a fund inside a Stocks & Shares ISA qualifies as a PFIC under IRC Sections 1297(a)(1) and 1297(a)(2). Classification should be finished before the 2025 Form 1040 filing deadline, including extensions.

• Income test: A fund deriving 75% or more of gross income from passive sources such as dividends, interest, rents, royalties, or annuities is a PFIC.
• Asset test: A fund with 50% or more of its assets producing passive income is a PFIC.
• ISIN prefix check: IE, GB, or LU generally means treat the holding as a PFIC until confirmed otherwise; US generally means not a PFIC if the fund is US-domiciled.

Action: List every fund held in the ISA, note each fund’s domicile country and ISIN prefix, and classify each holding before preparing Form 1040.

Step 2 – Choose a PFIC taxation method

Three PFIC methods are available under US law. For many UK Stocks & Shares ISA holders, the mark-to-market election is the most practical route because most UK funds do not publish the PFIC Annual Information Statement required for a QEF election.

• Mark-to-market election: Recognizes annual unrealized gain or loss as ordinary income or limited ordinary loss. The election should be made on a timely Form 8621 for the first year it is available.
• QEF election: Requires the fund to issue a PFIC Annual Information Statement each year. Without that statement, the QEF election generally cannot be supported.
• Default excess distribution method: Applies when no valid election is made. Excess distributions are generally amounts above 125% of the average distributions received during the prior 3 years, and tax plus interest can apply retroactively.

Step 3 – Calculate and report on Form 8621

Under the mark-to-market method, annual PFIC gain generally equals the excess of the fund’s year-end fair market value over its adjusted basis, converted to USD using a reasonable exchange-rate method for the filing. The resulting ordinary income is reported on Form 8621 and carried to Form 1040.

Based on our client scenario at TFX:

• Fund value on 1 January 2025: £10,000
• Fund value on 31 December 2025: £11,500
• Representative GBP/USD rate used for the calculation: 1.27
• MTM gain: (£11,500 − £10,000) × 1.27 = $1,905 of ordinary income

Report the MTM result in Form 8621 Part IV and carry ordinary income to Schedule 1 (Form 1040), Line 8z, “Other income,” when applicable. File one Form 8621 per PFIC fund; if the ISA holds 4 PFIC funds, prepare 4 separate Forms 8621.

FBAR and FATCA reporting for ISA accounts

US expats must report ISA accounts on two separate foreign account disclosure forms: FinCEN Form 114 (FBAR) and IRS Form 8938. Both are information returns, not income tax returns. Current 2026 maximum FBAR civil penalties are $16,536 for a non-willful violation and, for willful violations, the greater of $165,353 or 50% of the account balance.

The following table compares FBAR and Form 8938 across 6 criteria – most US expats with ISA accounts above the applicable threshold must file both forms for the same account in the same tax year.

An ISA is a foreign financial account for FBAR purposes because it is maintained at a UK financial institution. An ISA is also a specified foreign financial asset for Form 8938 purposes when the FATCA ISA threshold is met. The two forms are not substitutes.

File FBAR electronically through the FinCEN BSA E-Filing System and review the IRS Form 8938 filing rules before deciding whether FATCA applies.

The expat ISA allowance under UK law is not the same as a US reporting threshold. If your aggregate foreign accounts exceed $10,000 for even 1 day, FBAR penalties for late filing become relevant, and TFX’s FBAR filing support can help reconcile UK statements to US reporting values.

Is a UK ISA a foreign trust?

The IRS has not issued official guidance specifically classifying UK ISAs as foreign trusts. The majority position among US expat tax practitioners is that an ISA is a custodial account, not a trust, and that Form 3520 and Form 3520-A are generally not required for a standard UK ISA.

The following 2 legal positions explain why the foreign trust ISA question still arises:

• Custodial account position (majority): An ISA is a registered account held at a UK bank or broker where the holder retains beneficial ownership. The ISA manager holds assets on behalf of the subscriber, which most practitioners interpret as a custody relationship rather than a trust transfer.
• Foreign trust position (minority): Under IRC Section 7701(a)(30)–(31), some arrangements where a third party manages assets for another person can theoretically be analyzed as trusts for US tax purposes.

TFX recommends treating a UK ISA as a custodial account and not filing Form 3520 for a standard ISA. Because the IRS has issued no definitive ISA-specific guidance, US holders with Stocks & Shares ISA balances above $100,000 should consider attaching a 1-paragraph disclosure statement to Form 1040 explaining the position taken.

Use the IRS Form 3520 official page to confirm what the form is designed to report. The question “Is ISA a trust US tax” should be answered carefully: a Form 3520 ISA filing is not the majority approach, but very large or unusual arrangements deserve individual review.

Missed ISA reporting? Streamlined Filing Procedures explained

US expats who non-willfully failed to report ISA income or file FBAR for prior years can use the IRS Streamlined Foreign Offshore Procedures to come into compliance. SFOP requires 3 amended or delinquent Form 1040 returns, 6 FBARs, and Form 14653; FBAR penalties are waived, but back taxes and IRS interest are due.

The following 1 eligibility test is central to SFOP for Americans abroad: the taxpayer must meet the non-residency test, which generally means being physically outside the US for at least 330 full days in at least 1 of the 3 most recent years covered by the submission.

The following 4-step SFOP process applies when a missed ISA filing was non-willful:

1. File amended or delinquent Forms 1040 for the 3 most recent tax years, including Form 8938 and Form 8621 for each PFIC fund where required.
2. File delinquent or amended FBARs for the 6 most recent years.
3. Submit Form 14653, Certification by US Person Residing Outside of the United States, certifying non-willful conduct.
4. Pay back taxes and IRS underpayment interest; the underpayment rate for Q2 2026 is 6%.

Streamlined domestic offshore procedures is the alternative for US residents who do not meet the SFOP non-residency test. It carries a 5% miscellaneous offshore penalty calculated on the highest aggregate balance of unreported foreign financial assets across the applicable disclosure period.

SFOP is not available for willful non-compliance. Taxpayers who intentionally concealed ISA accounts should consider the IRS Voluntary Disclosure Practice instead of Streamlined Filing Procedures.

For a detailed cleanup path, see TFX’s Streamlined Foreign Offshore Procedures guide for US expats. This is where missed ISA filing, expat open ISA reporting, and the question: can US expats use cash ISA compliance routes usually come together.

Missed ISA reporting? Use the SFOP services by TFX, which helped 2,200+ Americans get compliant with the IRS

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ISA type decision guide – which forms do I file?

This 5-row decision guide maps each ISA type to the US forms most likely to apply for the 2025 tax year filed in 2026. Identify the ISA type first, then file all income tax and disclosure forms listed in that row when the relevant thresholds are met.

The following 5-row table shows which IRS forms each ISA type requires – identify your ISA type in the left column and file all forms listed in that row.

FBAR and Form 8938 are not substitutes. Most expats with ISAs in the UK and aggregate foreign account balances above $10,000 must file FinCEN Form 114, and some must also file IRS Form 8938 for the same account in the same year.

Conclusion

ISA reporting for US expats – key facts (2026)

• ISA income is taxable in the US – the UK tax exemption does not apply to US citizens or green card holders.
• Cash ISA: report interest as ordinary income; file FBAR if aggregate foreign accounts exceed $10,000; file Form 8938 if above threshold.
• Stocks & Shares ISA: file one Form 8621 per PFIC fund when required; the mark-to-market election is often the most practical method for UK fund holders.
• Lifetime ISA: taxable US income each year; no DTA protection; the 25% HMRC withdrawal penalty does not automatically reduce US taxable income.
• FBAR non-willful penalty: up to $16,536 per form per year, current 2026 maximum; willful penalty: greater of $165,353 or 50% of the account balance.
• Missed filings: Streamlined Foreign Offshore Procedures require 3 amended returns and 6 FBARs; FBAR penalties are waived for eligible non-willful taxpayers, while back taxes and 6% Q2 2026 interest may be owed.

Taxes for Expats (TFX) has prepared US tax returns for American expats in the UK since 1999. TFX helps clients with PFIC analysis, Form 8621 elections, FBAR compliance, and Streamlined Filing Procedures for unreported ISA accounts. For TFX UK expat tax services, schedule a free consultation or request an Instant Quote to get started.

Reid Kopald

EA. Tax Manager

Reid Kopald is a seasoned tax manager and Enrolled Agent (EA) with a decade of experience. He holds a BA in Philosophy and an MS in Finance from the University of Arizona and provides strategic tax solutions at TFX.

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