ExpatInvest UK

Education Center

Learn about PFIC rules, tax compliance, and investment strategies for US expats in the UK

Understanding PFIC Rules
Passive Foreign Investment Companies and why they matter

What is a PFIC?

A Passive Foreign Investment Company (PFIC) is any non-US corporation that meets either the income test (75%+ passive income) or asset test (50%+ passive assets). Most UK mutual funds, unit trusts, and investment trusts are classified as PFICs by the IRS.

Why PFICs Are Problematic

  • Punitive taxation: Gains taxed at ordinary income rates (up to 37%) plus interest charges
  • Complex reporting: Annual Form 8621 required for each PFIC holding
  • High compliance costs: $500-2,000 per fund per year in professional fees
  • No capital gains treatment: Cannot benefit from lower long-term capital gains rates
  • No tax-loss harvesting: Losses cannot offset other gains

The ISA Trap

UK ISAs (Individual Savings Accounts) are tax-free in the UK but are NOT recognized by the IRS. Any funds held in an ISA are still subject to US taxation, and if they contain non-US funds, they trigger PFIC rules. This makes ISAs unsuitable for US citizens.

UK HMRC Reporting Funds
The solution for avoiding UK excess reportable income charges

What Are Reporting Funds?

UK HMRC maintains a list of offshore funds (including US ETFs) that meet specific reporting requirements. Funds on this list qualify for UK capital gains tax treatment rather than income tax rates on gains.

Why This Matters

  • Tax efficiency: Gains taxed at 10-20% CGT rates instead of 20-45% income tax
  • Annual allowance: First £3,000 of capital gains are tax-free (2024/25)
  • Simpler reporting: Report on UK Self-Assessment, no complex calculations

The Sweet Spot

US-domiciled ETFs with UK reporting status are the ideal solution: they avoid PFIC treatment for US tax purposes AND qualify for UK capital gains treatment. This platform only recommends ETFs that meet both criteria.

Tax Compliance Requirements
Understanding your filing obligations

Quick Links
IRS Form 8621 (PFIC)HMRC Reporting Funds ListFinCEN FBAR FilingUS-UK Tax Treaty
Need Help?
Professional guidance recommended

Cross-border tax is complex. Consider consulting with professionals who specialize in US expat taxation:

  • Enrolled Agents (EA)
  • Certified Public Accountants (CPA) with expat experience
  • Cross-border financial advisors
  • UK Chartered Tax Advisers familiar with US rules
Start Investing

Ready to build a compliant, tax-efficient portfolio?

Get Started