PFIC reporting for Americans in the UK: funds, ISAs and investment trusts

If one topic justifies specialist US preparation for Americans in the UK, it is passive foreign investment companies. Ordinary UK fund holdings fall into a US regime designed to punish offshore deferral, and the reporting is per fund, per year.

What makes a fund a PFIC

A foreign corporation is a PFIC if 75% or more of its gross income is passive, or 50% or more of its assets produce passive income. Collective investments meet both tests. UK unit trusts, OEICs, investment trusts, London-listed ETFs (including ones tracking US indices) and the funds inside stocks-and-shares ISAs and general accounts are PFICs. Shares in operating companies held directly, UK gilts and corporate bonds, cash and Premium Bonds are not.

The default regime: section 1291

Without an election, gains on sale and "excess distributions" (distributions above 125% of the three-year average) are spread over your holding period, taxed at the highest ordinary rate for each year, and charged interest. No capital gains rates, no matter how long you held the fund. Effective rates above 40–50% are common on long-held funds.

Election 1: qualified electing fund (QEF)

Under section 1295 you include your share of the fund's ordinary earnings and net capital gain each year, with capital gains rates preserved and no further tax on sale. It needs a PFIC Annual Information Statement from the fund, which most UK managers do not produce, and it should be made in the first year of holding; later years need a purging election.

Election 2: mark-to-market

Under section 1296, for shares regularly traded on a qualified exchange (the London Stock Exchange qualifies), you include the year's increase in value as ordinary income each year, deduct decreases only against earlier inclusions, and treat gain on sale as ordinary income. Investment trusts and listed ETFs can use it; unit trusts and OEICs generally cannot.

Form 8621

One form per PFIC per year. It is always required under QEF or mark-to-market, and under the default regime in any year with a distribution, a sale, or when total PFIC holdings exceed US$25,000 (US$50,000 married filing jointly). A return missing a required Form 8621 stays open to assessment for everything on it.

ISAs and pensions

ISAs give no US shelter; funds inside them are PFICs needing Form 8621 each. Funds inside a pension that qualifies for treaty treatment are generally outside annual PFIC reporting while they remain in the scheme. See ISAs and SIPPs.

Practical choices

• US-listed ETFs are US corporations and not PFICs; many US persons in the UK hold them in a general investment account.
• Individual UK shares avoid the regime.
• Make mark-to-market elections on listed investment trusts in the first year.
• Ask fund managers for PFIC statements; a few larger groups provide them.
• Accumulation units generate notional income that still has to be reported.

We explain the tax consequences; the investment decision is yours or your financial adviser's.

Frequently asked questions

I have held UK funds for years and never filed Form 8621. What now?

Depending on what else was missed: Streamlined (returns and income also missed), Delinquent International Information Return procedures (returns complete, forms missed), or amended returns with the section 1291 computation if you are selling. Each needs the facts assessed first.

Do I file Form 8621 if the fund lost money?

Under the default regime, yes if total PFIC holdings exceed the threshold, and always under an election.