UK tax and investment questions

[FEDUKE404]

A client needs to report his "world-wide" income and I'm having some difficulty getting answers as to exactly what type of foreign accounts he has. Obviously the tax/investment rules differ between the US and UK.

Checking account: Pays a small amount of interest, and is reported in format of "interest paid after tax deducted." The basic tax appears to be 20%, i.e. $100 of interest would be reported as "$80 interest paid after tax deducted." I would show $100 of income on Sch B, and include the $20 tax on Form 1116.

ISA accounts (this is where the fun begins!:

Cash ISA: "A cash ISA is a cash based investment which interest is paid without the deduction of tax."

Stocks and shares ISA: "There is no interest for a stocks and shares ISA but dividends are reinvested."

It appears the S&S ISA is merely an investment vehicle, loosely comparable to an "in-house" mutual fund. Client has provided to me the ~monthly "dividends" but of course there are US tax documents. There is no UK tax withheld at the source, also the client owns NO cash ISA.

The ISA does not appear to be anything comparable to an IRA arrangement, so I feel the income is fully taxable on the US return. Assuming the income falls into the "dividends" category, there is obviously no (realistic) way to determine whether any of those dividends is "qualifying."

MAJOR CAVEAT: It seems that funds placed into an ISA are after-tax (UK) and "not subjected to income tax or capital gains tax within a holding or upon withdrawal." Can/does this exclusion apply to US taxation, and then this entire issue evaporates?? I'm certain the client would breathe a sigh of relief!

As best I can tell, I might have to report the interest (at 100% less 20% tax elsewhere) on Schedule B, and I will have to report the ISA reinvested dividends (with none qualifying) on Schedule B also.

Suggestions? Disagree? Sounds correct?

Thanks as always!

FE

[appelman]

I'd agree with your last paragraph.

You might be able to dig and find out if some of the dividends meet the requirements for qualifying foreign dividends.

[FEDUKE404]

Update on ISA issues

You might be able to dig and find out if some of the dividends meet the requirements for qualifying foreign dividends.

Your point is correct, but that could present a mountain of work. I do know that, for 2011, there were around 15 separate earnings payments. Underlying sources of same is unknown.

It looks as if the ISA is somewhat the UK equivalent of a Roth IRA. In the UK, annual earnings within the account, and any gain when you cash in the shares, are exempt from UK tax. Funds placed into the account are after-tax also.

The gorilla in the tax room is that, apparently, IRS rules do not recognize the account as having such exclusions. The tax scenario can vary depending, each year, upon the amount of time the person spends outside of the US.

I fear the income WILL be subject to US taxation, at least this year. Here is the link to a nice discussion by persons who have a much better grasp on the issues:

http://britishexpats.com/forum/showthread.php?t=514993

But I remain open to input from the usual TTB experts whose knowledge exceeds my own!

FE

[Kram BergGold]

Roth Equivalent

If the account is a Roth Equivalent I would not tax it in US until distributions are made from it.

[FEDUKE404]

Does ANYONE really know?

If the account is a Roth Equivalent I would not tax it in US until distributions are made from it.

Please note I stated "somewhat" equivalent to a Roth IRA, only for (as they say) "illustrative purposes." Assume you did review the link, which includes the below.

In the meantime, I will keep digging around.......

FE


I just spent about 1.25 hours on the phone with the IRS getting the run around on this issue. The final person I spoke to said that if the closest definition of the UK account was as a "Roth IRA" then it would be treated for tax purposes like that. I explained that an ISA is not a retirement account but does have a tax advantaged status (like a Roth does).

Seems like an area of tax law that most of the IRS representatives are not sure about. Thus, I am still not sure what the correct way to deal with this is...

The question regarding cashing in stocks & shares is likely more complex than dealing with simple interest on a cash ISA, but I could not get a straight answer regarding the latter even.

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Ive been in the US now for 4 years and have always paid tax on my ISA, since the 'experts' at Deloitte and Touche determined that it was taxable. However Deloitte will naturally air [err] on the side of caution when they don't know the answer as they are putting their name on the tax return.

Like everyone else I have exhausted all avenues to get clarification on whether the tax free part of the ISA is honoured by the IRS. Having tried to read the tax treaty document, no wonder nobody understands, its just full of legal bollocks.


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Deloittes are correct as is the thread above. ISA funds - essentially just unit trusts - are not recognised in the US and are classed as Passive Foreign Investment Companies (not good!).The interest/income and capital gains are taxable. The tax treaty does not apply. Not sure whether you have cashed any in, but if you haven't then don't if you can help it. Any gains are taxable from inception on full or part surrender plus interest on the gain too for the number of years you've held it. Tax is payable at your highest marginal rate in the time you've had them - fairly punitive eh!