Americans who live in the UK have different financial options open to them, in particular in terms of investment and taxation. A unique option for UK citizens is an Individual Savings Account (ISA). ISAs have tax benefits in the UK, but they are not taxed by the IRS in the US. Americans can be significantly advantaged from investing in ISAs.
Some false reasons a US Person should not invest in ISA
Let’s be clear: Americans should invest in ISAs; to not use the UK allowance is financial ignorance.
There are common questions about ISA and problems for Americans. Let’s bust some false answers as they are incorrect and too frequently peddled.
| Common ISA questions from American in the UK | The truth and fact based answer |
| Can I open an ISA as an American? | Yes, you can. There is no legislation reason to prevent an American in the UK from investing in an ISA. Some financial institutions do not accept Americans because of the compliance and monitoring burdens put on them by FATCA. |
| Can US citizens have a cash ISA? | Yes, you can. There is no legislation reason to prevent an American in the UK from investing in an ISA. Some financial institutions do not accept Americans because of the compliance and monitoring burdens put on them by FATCA. |
| Americans cannot invest in an ISA? | False, Americans can invest into an ISA if they choose and are resident in the UK. |
What is an ISA?
An ISA is a UK-based investment/savings account that lets you save or invest up to £20,000 per year and pay no UK tax on interest, dividends or capital gains. There are different ISAs:
- Cash ISAs: Focused on savings with interest earned tax free in the UK.
- Stocks and Shares ISAs: Allows to invest in stocks, funds, and securities.
- Lifetime ISAs (LISAs): Perfect for first-time homebuyers or retirement savings, with a 25% government bonus of up to £4,000 a year.
Do we recommend ISAs to US UK Citizens?
Yes, ISA provides tax-advantaged benefits in a higher tax jurisdiction, so they have advantages for US taxpayers resident in the UK. There are some complexities to overcome, including holding the right investments and avoiding punitive taxes. Financial advice can provide a clear path to investment for dual citizens.
The UK Tax Benefit of ISAs
For UK taxpayers, ISAs are a win-win. They eliminate taxes on:
- Dividends from stocks and shares.
- Capital Gains on investments sold in the ISA.
- Interest on Cash ISAs.
The Tax View From the United States To ISAs
Unfortunately, the United States does not treat ISAs as tax-sheltered accounts. This means that:
- Dividends and interest are U.S. taxed.
- Capital gains realised within the ISA are taxable in the U.S.
- Things can be complex around reporting requirements due to PFIC (Passive Foreign Investment Company) rules of mutual funds and ETFs in Stocks and Shares ISAs. Edale can solve this by advising you how to invest and be in compliance with the tax rules. The high street solution for Brits does not work for Americans and hence the benefit of getting financial advice to avoid punitive taxes.
Nonetheless, there are many good reasons for UK Americans to invest in ISAs if they use the long-term buy-and-hold strategy.
Leveraging the Buy-and-Hold Strategy
Buy-and-hold investing entails buying investments and holding them for a long period of time so that you have the least need to cash out, and can pay US taxes later. Below we show how this approach is implemented in ISAs we advise for clients.
Example 1: Buying Single Stocks, etc.
- Scenario: An American in the UK puts £20,000 into individual stocks in a Stocks and Shares ISA. Over 10 years, the portfolio has grown to £50,000, and no assets have been sold during this time.
- UK Tax: There is no tax on capital gains, dividends or interest in the ISA.
- U.S. Tax: Dividends are to be taxed as well as any interest on residual cash held in the portfolio, but no capital gains are payable unless the stocks are liquidated. This delay in taxes provides more room for the portfolio to grow.
Example 2: Cash in a Cash ISA.
- Scenario: The same individual opts for a Cash ISA with a 3% per annum interest rate of £20,000. Five years later, it is £23,185 in the account.
- UK Tax: £3,185 in interest is not taxed.
- U.S. Tax: Interest is taxable annually, but the annual return is low risk and tax effective in the UK.
Example 4: Using Lifetime ISA to Pay for a Home Purchase
- Scenario: Americans contribute £4,000 a year to Lifetime ISA over 5 years and receive £5,000 in government bonus. The account is then applied towards a first home.
- UK Tax: The £5,000 bonus and account growth is tax-free.
- U.S. Tax: The annual 25% bonus is taxed as an income by the IRS. But the tax bonus outweighs the tax burden.
Why ISAs Make A Good Deal for Americans in the UK
- Tax-Free UK Growth: The tax benefits of an ISA in the UK outweigh US tax, especially for longer-term investments.
- Forex Risk: ISAs enable you to save and invest in GBP in line with UK expenses and mitigate exchange rate risk.
- Simplified Reporting For Certain Assets:** Owning individual stocks or holding cash in ISAs reduces expensive U.S. reporting burdens over mutual funds and ETFs.
- Portability: ISAs allow you to withdraw cash without penalty (except for LISAs with certain restrictions), and they are easier to access than U.S. retirement accounts such as Roth IRAs.
Some Important Things To Know About Americans Using ISAs
- Skip PFICs: U.S. PFIC reporting is complex and liable to levie excessive taxes. Stick to single stocks or cash in ISAs for ease of administration.
- Use Financial Experts: An adviser who knows U.S. and UK tax rules will ensure you have the most efficient strategy and the least amount of responsibility.
- Leverage U.K. Tax-Free Allowances: Take advantage of UK tax-free allowances and avoid US tax burdens with ISAs.
The Tax Advantage for Dual Citizens Using an ISA
To show the tax advantages for a US taxpayer in the UK we have taken the main UK tax rates (Lower Rate, Higher Rate, and Additional Rate taxpayers) to create a comparisons of UK and US tax rates on interest earned in taxable accounts using ISAs.
Lower Rate Taxpayer (Earned Income up to £50,270)
| Account Type | UK Income Tax on Interest | US Income Tax on Interest (Single Filer) | US Income Tax on Interest (Married Filer) |
|---|---|---|---|
| General Taxable Account | 20% | 12% | 10% |
| ISA | 0% | 12% | 10% |
Tax Savings Using an ISA:
- Single Filer: 8% (UK rate)
- Married Filer: 10% (UK rate)
Higher Rate Taxpayer (Earned Income £50,271 to £125,140)
| Account Type | UK Income Tax on Interest | US Income Tax on Interest (Single Filer) | US Income Tax on Interest (Married Filer) |
|---|---|---|---|
| General Taxable Account | 40% | 22% | 22% |
| ISA | 0% | 22% | 22% |
Tax Savings Using an ISA:
- Single Filer: 18% (UK rate)
- Married Filer: 18% (UK rate)
Additional Rate Taxpayer (Earned Income Over £125,140)
| Account Type | UK Income Tax on Interest | US Income Tax on Interest (Single Filer) | US Income Tax on Interest (Married Filer) |
|---|---|---|---|
| General Taxable Account | 45% | 24% | 22% |
| ISA | 0% | 24% | 22% |
Tax Savings Using an ISA:
- Single Filer: 45% (UK rate – 24% US rate) = 21%
- Married Filer: 45% (UK rate – 22% US rate) = 23%
Whilst a crude example these tables highlight the substantial tax advantages for US taxpayers in the UK who use ISAs, particularly for higher-rate and additional-rate taxpayers, where the UK tax savings far outweigh the US tax implications.
For the 2025 tax year, the long-term capital gains tax rates in the United States remain at 0%, 15%, and 20%, with income thresholds adjusted for inflation. Short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, which range from 10% to 37%, depending on taxable income and filing status.
| Filing Status | 0% Rate (Income up to) | 15% Rate (Income Range) | 20% Rate (Income over) |
Single | $48,350 | $48,351 – $533,400 | $533,401 |
Married Filing Jointly | $96,700 | $96,701 – $600,050 | $600,051 |
Married Filing Separately | $48,350 | $48,351 – $300,000 | $300,001 |
Head of Household | $64,750 | $64,751 – $566,700 | $566,701 |
These rates apply to profits from the sale of assets held for more than one year.
The United Kingdom has implemented changes to Capital Gains Tax (CGT) rates and allowances. Below is a summary of the updated rates:
Annual Exempt Amount (AEA):
| Tax Year | Individuals, Personal Representatives, and Trustees for Disabled People | Other Trustees |
|---|---|---|
| 2025/26 | £3,000 | £1,500 |
Capital Gains Tax Rates in the UK:
| Asset Type | Disposal Date | Basic Rate Taxpayers | Higher and Additional Rate Taxpayers | Trustees and Personal Representatives |
|---|---|---|---|---|
| Residential Property | On or after 30 Oct 2024 | 18% | 24% | 24% |
| Other Chargeable Assets | On or after 30 Oct 2024 | 18% | 24% | 24% |
| Business Assets (qualifying for Business Asset Disposal Relief) | On or after 6 Apr 2025 | 14% | 14% | N/A |
An ISA offers significant capital gains tax benefits for Americans residing in the UK, even though the U.S. still taxes the gains. The removal of UK CGT creates a significant advantage: the investor only pays the U.S. tax liability and that is at a rate that is lower than the UK. A buy-and-hold strategy defers U.S. taxes and leverages the preferential U.S. long-term capital gains rates of 0%, 15%, or 20%. By comparison, UK capital gains tax are now 18% and 24%.
For Americans in the UK, ISAs offer a great way to accumulate wealth tax-efficiently in the UK even if it is taxed at a U.S. level. Through buy-and-hold and tax-efficient investing, you can maximise the advantages of an ISA with as little pain as possible on taxation. With proper planning, ISAs can be your most significant enabler in obtaining financial freedom abroad.