Premium Bonds and Junior ISAs are tax-free in the UK and have no special status in the United States. For a US citizen or green card holder, prizes and the income and gains inside a Junior ISA belong on the US return, and both holdings are generally reported as foreign accounts. In most households the tax is small. The reporting is the part that gets missed.
This post is for American parents in the UK, and for adults who were given Premium Bonds years ago and have never thought of them as a US matter. It goes further than our guide to FBAR and FATCA for UK residents on these two products: how each is treated on the FBAR, on Form 8938 and on Form 1040, what changes when the holder is a child, and what to do about earlier years.
Are Premium Bond prizes taxable in the US?
Yes. Premium Bond prizes are exempt from UK income tax and capital gains tax, but that exemption is a UK rule. The United States taxes its citizens and residents on worldwide income (opens the official IRS page in a new tab) and has no exclusion for the prizes, so a US person reports them on Form 1040 for the year in which they are won.
A Premium Bond pays no interest. Each bond is entered into a monthly draw, and the return comes as prizes that vary from month to month. The IRS has published nothing that addresses Premium Bonds by name. Its general position is that prizes and winnings, including those from lotteries and raffles, are fully taxable and are reported on the return. For most holders it makes little difference to the tax whether a prize is described as a prize or as a return on savings, since either way it is ordinary income. We report prizes as other income, converted to dollars.
There is usually no UK tax on the prize to credit against the US tax, because the UK charges none. That is the general problem with UK tax-free products: the foreign tax credit works by offsetting tax that was paid, and here nothing was paid. Whether any US tax actually results depends on the rest of the return, including the standard deduction. The prize has to be reported either way.
Do Premium Bonds go on the FBAR?
Neither FinCEN nor the IRS has said so by name, and the cautious practice, which we follow, is to report them. Premium Bonds are held in an account with National Savings and Investments, with a holder's number and a balance that can be cashed in, and they count towards the $10,000 aggregate test at their face value.
The FBAR covers financial accounts at institutions outside the United States, and the IRS notes in its FBAR guidance (opens the official IRS page in a new tab) that an account does not have to produce taxable income to be reportable. A modern Premium Bond holding looks like an account in every practical respect. Older holdings bought as paper certificates are less obviously so, but they are recorded against the holder all the same, and we treat them alike.
The value to report is the highest total holding in the calendar year, converted as described in our post on the FBAR maximum value and exchange rate. Because the bonds do not rise and fall in value, the figure is simply the largest amount held. Prizes that are reinvested increase the holding. Prizes paid out to a bank account do not, and appear in that account's balance instead. Listing a holding on FinCEN Form 114 that turns out not to be required carries no cost.
- The NS&I holder's number and the address of NS&I
- The highest total holding during the calendar year
- Prizes won in the calendar year, month by month
- Whether prizes were reinvested or paid out to a bank account
How does the US treat a Junior ISA?
As an ordinary account owned by the child. A Junior ISA is opened and managed by a parent or guardian, but under the UK rules the money belongs to the child. The United States does not recognise the UK tax exemption, so interest, dividends and gains inside it are the child's income for US purposes if the child is a US person.
A Junior ISA is one of the Individual Savings Accounts (opens the official GOV.UK page in a new tab) the UK offers. It comes in a cash version and a stocks and shares version. The child can take over its management at sixteen, and nothing can be withdrawn until the child turns eighteen. For a US child that lock-in has no US effect. The income is taxed as it arises, whether or not anyone can reach it, and the account is reportable from the day it is opened.
The stocks and shares version raises the larger issue. UK funds, including the index trackers that many providers offer, are commonly passive foreign investment companies under US rules, and each one may need Form 8621. The instructions for that form (opens the official IRS page in a new tab) contain an exception for small holdings, where the total value of a person's PFICs is below $25,000 and there has been no distribution or disposal that the regime taxes. Many children's accounts fall within it while they are small. Our article on why a stocks and shares ISA worries the IRS explains the regime, and our PFIC reporting service prepares the forms.
Who reports a US child's accounts?
The child does, through a parent. FinCEN's FBAR instructions (opens the official FinCEN page in a new tab) say a child is generally responsible for filing their own report, and that where the child cannot file or sign because of age, a parent or guardian must do it for them. The threshold is tested on the child's own accounts.
Take a US citizen married to a British husband in Bristol, whose daughter is a US citizen through her. The daughter has a Junior ISA and Premium Bonds bought by her grandparents. If the highest values of the two together exceed $10,000 in a calendar year, an FBAR is due in the daughter's name, signed by her mother. If they do not, no FBAR is due for the daughter, however large the mother's own accounts are. The two are tested separately.
The mother's own FBAR is a separate question. A person reports accounts over which they have signature authority as well as those they own, and a parent who manages a Junior ISA or holds Premium Bonds on a child's behalf may have that authority. Whether she does depends on what the provider's terms allow her to do, so we look at the account documents. Where the answer is unclear, listing the account on the parent's report as well is the cautious course. A child who is not a US person has no FBAR of their own, but the same question about a US parent's authority arises.
Does the child need a US tax return?
Sometimes. A child with enough income must file a return like anyone else, and a child's unearned income above a threshold set each year is taxed under special rules. For a small cash Junior ISA and a modest Premium Bond holding, the income is often below the level at which a return is needed.
Where a child does have to file, the tax on unearned income above the annual threshold is worked out on Form 8615, the mechanism often called the kiddie tax. A parent can in some cases elect to report a child's income on their own return instead, using Form 8814, but that election is limited to interest and dividends. On the treatment we follow, Premium Bond prizes are neither, so the election may not be open to a child who has prizes.
Form 8938 follows the tax return. A child who has no return to file has no Form 8938 to file, whatever the accounts hold. Where a return is required, the thresholds for a person living abroad apply: $200,000 at year end or $300,000 at any time for someone not filing jointly, as the IRS comparison of Form 8938 and FBAR requirements (opens the official IRS page in a new tab) sets out. Few children reach it. A parent who elects to report a child's income on their own return is treated as having an interest in the child's assets for this purpose.
What should you do about earlier years?
Start by listing what exists: every Premium Bond holding and children's account, when it was opened, and its highest value each year. Then work out which reports were actually due. In many families the child's accounts never crossed the threshold, and the only gap is income left off an adult's return.
Where FBARs were missed, they are filed late through the same system with a reason for the delay, as set out in our post on late FBARs. Where income was also left off returns and the failure was non-wilful, the streamlined procedures may be the right route. It is better to settle the whole position before filing anything, so that the returns and the reports agree with each other.
Going forward, the simplest habit is one schedule of accounts for the household, updated each January, that feeds the FBARs, Form 8938 and the returns. Our foreign income and FBAR reporting service builds it, and the document checklist in our client portal lists the statements needed for each account. For the full rules on which UK accounts count, return to the guide to FBAR and FATCA for UK residents.
- NS&I statements or the online holding history for each holder
- Junior ISA annual statements and the names of any funds held
- Each child's citizenship position and Social Security number, if any
- Copies of any FBARs and US returns already filed
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
