Investing in the UK as a US Citizen: Tax Rules & Risks

For a US citizen living in the UK, investing is governed by two tax systems at once, and they do not always agree. A product that is sensible - even tax-free - for your British neighbour can be a slow, expensive mistake for you. The good news is that the pitfalls are well understood and avoidable. The bad news is that nobody warns you about them unless they understand both systems, and a great deal of ordinary UK financial advice does not.

This article is the foundation for the rest of this series. It is written for US citizens and other US persons living in the UK who invest, or want to, while answering to both the IRS and HMRC. It explains how dual taxation actually works, which accounts help and which hurt, and what to avoid - then points to the deeper articles on each point.

The dual-reporting reality

The United States taxes its citizens and green-card holders on worldwide income wherever they live. The UK taxes its residents on their income and gains. As a US person resident in the UK, you are therefore inside both systems simultaneously, and you file in both: a UK Self Assessment return and a US federal return. This sounds like a recipe for double taxation, but it usually is not. Foreign tax credits and the US-UK treaty a redesigned so that tax paid in one country offsets tax owed in the other. The result is generally that you pay the higher of the two rates overall, not both in full - provided the credits and treaty positions are claimed properly.

One important recent change: from 6 April 2025 the UK replaced the old non-domicile remittance basis with a residence-based system. New arrivals to the UK may qualify for the four-year Foreign Income and Gains (FIG) regime, which can shelter foreign income and gains in the early years of UK residence. After that window, UK tax applies to worldwide income and gains on the arising basis.

Accounts and wrappers: what works and what hurts

ISAs

An ISA is tax-free under UK law, but the IRS does not recognise that shelter. For a US person, income and gains inside an ISA are fully US-taxable, and a typical stocks-and-shares ISA holds PFICs. Cash ISAs are less damaging than fund-based ISAs, but neither delivers the US-side magic a UK saver enjoys. ISAs have their own dedicated articles later in this series.

SIPPs and workplace pensions

UK pensions are generally treaty-protected, so their growth can be deferred from current US tax - but the funds held inside a SIPP can still raise the PFIC question, and an employer match is usually worth keeping. Pensions are covered in the previous series.

General investment accounts

An ordinary UK general investment account holding UK funds combines full UK taxation with full US taxation and, frequently, PFIC treatment - often the worst of all worlds for a US person.

US brokerage accounts

A US brokerage account holding US-domiciled funds and individual shares is frequently the cleanest home for a US person's investments: no PFIC problem, familiar US tax treatment, and US regulatory protection. Whether you can keep one with a UK address is its own question, addressed later in this series.

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The PFIC problem, in brief

The reason 'ordinary UK funds' keep appearing on the wrong side of the ledger is the Passive Foreign Investment Company regime. Most non-US pooled funds - OEICs, unit trusts, investment trusts, and ETFs - are PFICs in US eyes, and PFICs are taxed at punitive rates with interest charges and an annual Form 8621 for each holding. The practical escape routes are to hold individual shares directly, or to hold US-domiciled funds, typically through a US account. This is important enough to have its own article next in the series.

How your investment income is taxed across both systems

Dividends, interest, and capital gains are each seen by both authorities. On the UK side, 2025/26 gives a £500 dividend allowance and a £3,000 capital gains annual exempt amount, with tax above those levels depending on your band. On the US side, the same income is reported again, with foreign tax credits relieving the overlap. The mechanics differ by income type - the US distinguishes qualified from ordinary dividends, and short- from long-term gains - and the timing and currency of each transaction matter. The headline point is simple: every distribution is a two-country event, and planning the type and location of your investments is how you keep that efficient.

Reporting: the forms that follow you

Investing as a US person in the UK comes with information reporting on top of your tax returns. The usual cast includes the FBAR for foreign accounts totalling $10,000 or more, Form 8938 once your foreign assets cross the FATCA thresholds (which are higher for those living abroad), and Form 8621 for any PFICs. None of this is optional, and the penalties for missing it are real. The dedicated reporting article in this series sets out who files what.

What to avoid: a short checklist

• Stocks-and-shares ISAs and ordinary UK funds (OEICs, unit trusts, investment trusts, ETFs) held directly - these are usually PFICs for a US person.
• Closing a US brokerage accounton arrival and reinvesting the proceeds into UK retail funds.
• Offshore investment bonds andsimilar non-US insurance wrappers, which carry their own US complications.
• Assuming an ISA is tax-free to the IRS, or that 'my UK adviser sorted it' means your US position is handled.
• Premium Bonds and similar UK products whose prizes, while tax-free in the UK, are taxable income in the US.

An illustrative example

Consider a hypothetical US citizen, age 38,who moves to London and, on local advice, opens a stocks-and-shares ISA and a general investment account holding popular UK index funds, while closing her US brokerage account 'to keep things simple'. Each step is reasonable in isolation and wrong for a US person: she has loaded up on PFICs, lost her tax-free US fund access, and multiplied her reporting - all while believing she has tidied up. Reversing those defaults, rather than adding to them, is where the value lies. This example is hypothetical and for illustration only.