U.S. citizens face a unique set of challenges because they are taxed on their worldwide income and gains, no matter where they live. This reality can make even seemingly straightforward financial decisions complex, especially when considering a relocation – or connection – to the United Kingdom. We strongly believe that understanding key pain points and knowing the right questions to ask along the way can help you navigate this challenge smoothly and avoid costly missteps in the future.
In this short post, we will give you a brief overview of the basic principles of saving in a stocks and shares ISA.
If you are a U.S. citizen or green card holder living in the U.K., you are taxed by the IRS on your worldwide income and gains. This reality can make otherwise simple choices—like opening a Stocks and Shares ISA—more complicated. In this brief article, we explore the key issues to help you to ask the right questions and avoid costly missteps.
Note: This article focuses exclusively on Stocks and Shares ISAs. Other types of ISAs, such as Cash, Innovative Finance and Lifetime, should be evaluated separately.
What is an ISA and why do U.K. taxpayers like them?
An ISA (Individual Savings Account) is a tax‑efficient wrapper for U.K. taxpayers. Investments held in a Stocks and Shares ISA can grow free from U.K. income and capital gains tax and withdrawals are flexible with no U.K. penalties.
Contribution rules (U.K.)
- You must be 18 or over to open a Stocks and Shares ISA
- The overall annual ISA allowance is GBP £20,000 per tax year (across all ISA types).
Illustrative compounding example (£20,000 per annum, compounded at 8% returns)
Time | Future Value |
|---|---|
1 Year | £21,600 |
5 Years | £126,719 |
10 Years | £312,910 |
15 Years | £586,486 |
20 Years | £988,458 |
25 Years | £1,579,088 |
30 Years | £2,446,917 |
Source: Brown Advisory calculations; for illustrative purposes only and not a guarantee of future results.
Sounds compelling—so should you open one?
It depends. For U.S. taxpayers, ISA benefits are often reduced because the U.S. treats ISAs like regular taxable accounts. That means income and gains inside the ISA are subject to U.S. tax.
Investment choice also matters. Few fund structures are efficient for both tax systems. Many U.K.-domiciled funds and ETFs are treated by the IRS as Passive Foreign Investment Companies (PFICs)—which brings punitive U.S. tax outcomes and complex reporting. This often leaves direct equities and bonds as one of the only viable investment options within an ISA.
Is there any good news?
Yes. A Roth IRA (a U.S. retirement account) offers ISA‑like benefits for U.S. purposes: tax‑free growth; contributions can be withdrawn anytime; and qualified withdrawals after age 59½ are tax‑free.
For U.K. residents, the U.S.–U.K. tax treaty generally addresses the U.K. tax treatment of U.S. pensions. In practice, Roth IRAs can be treated favourably for U.K. tax if structured and maintained correctly. Specific outcomes depend on facts and should be reviewed with specialist cross‑border advisers.
Key practical points:
- You must have earned income to contribute to a Roth IRA.
- Income limits apply and may restrict direct Roth contributions; check current thresholds.
- For 2025, the IRA contribution limit is USD $7,000 (or $8,000 if age 50+).
Illustrative compounding example ($7,000 Roth IRA contributions, compounded at 8%)
Time | Future Value |
|---|---|
1 Year | $7,560 |
5 Years | $44,352 |
10 Years | $109,518 |
15 Years | $205,270 |
20 Years | $345,960 |
25 Years | $552,681 |
30 Years | $856,421 |
Source: Brown Advisory calculations; for illustrative purposes only and not a guarantee of future results.
Bottom line
ISAs offer meaningful tax advantages for most U.K. taxpayers. However, for U.S.-connected persons, the benefits are generally harder to realise because of U.S. tax and PFIC rules. Before opening or funding an ISA, it is advisable to consult with qualified U.S./U.K. advisers—including accountants and investment managers—so your structure fits your goals and time horizon.
Time‑sensitive facts in this article are current as of 20th October 2025.
Sidebar: PFICs and U.K. reporting funds (quick guide for U.S.-connected clients)
- What is a PFIC? A Passive Foreign Investment Company (PFIC) is, broadly, a non‑U.S. pooled fund (e.g., most U.K. and international-domiciled mutual funds and ETFs) that meets certain income or asset tests under U.S. law. PFICs can trigger punitive U.S. tax and additional reporting.
- Why it matters: Potentially higher effective U.S. tax on gains and certain distributions; complex annual filings; PFIC status is about U.S. tax treatment, not investment quality.
- Ways to reduce PFIC friction: Select direct holdings (individual shares and bonds) when appropriate; when selecting funds, consider U.S.-listed funds that your platform permits and (where relevant) those that have U.K. reporting fund status for U.K. tax efficiency; confirm platform rules.
- What is U.K. reporting fund status? It is an HMRC regime for certain offshore funds. Funds with reporting fund status may allow investors to treat gains on disposal as capital gains rather than income, which can reduce tax liability (subject to conditions). it is important to note that reporting fund status does not determine PFIC status; the regimes are separate.
Whether you plan to spend a few years, a few decades, or the rest of your life outside the U.S., Brown Advisory can deliver a comprehensive cross-border investment plan for you and your family that can move with you wherever life may take you. Learn more >
Billy Mathews, a U.S. expat himself, is a Portfolio Manager in our London office and helps U.S.-connected clients build U.S./U.K. tax efficient investment portfolios to meet their long-term goals and objectives.
This material is not intended to be, and shall not be construed as being, investment or tax advice. Investment decisions should not be made on the basis of it. You should not act or rely on this document but should contact your professional adviser. This article has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. Past performance is not indicative of future performance and there is a risk that some or all of the capital invested may be lost.
The information contained herein is based on materials and sources that we believe to be reliable. We make no representation, either express or implied, in relation to the accuracy, completeness or reliability of that information. The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions including changes in tax law or practice. Brown Advisory does not provide tax advice.