PFIC Reporting
Form 8621, Form 8938, FinCEN 114, Form 1040
Form 8621 reporting and elections for US persons holding UK funds, investment trusts and non-US ETFs, inside or outside an ISA.
What does PFIC Reporting involve?
Ordinary UK investment funds are treated harshly by the US tax code. The passive foreign investment company rules were written to discourage Americans from investing through non-US funds, and they apply to a UK index tracker as readily as to anything exotic. We identify the PFICs, choose the least costly regime available, and file Form 8621.
Forms and filings involved
- Form 8621
The annual return for US persons holding passive foreign investment companies, which includes most UK funds, unit trusts and ETFs.
- Form 8938
The FATCA asset statement attached to the tax return, with higher thresholds for filers who live abroad than for those in the US.
- FinCEN 114
The annual report of foreign accounts filed with FinCEN, separate from the tax return, once combined balances pass the threshold.
- Form 1040
The annual federal return for US citizens, green card holders and US residents, reporting worldwide income wherever the filer lives.
Why UK funds cause US problems
A passive foreign investment company is, broadly, a non-US company whose income or assets are mostly passive.
Most UK unit trusts, OEICs, investment trusts and non-US exchange traded funds fall within the definition. ISAs have no US tax protection, so funds held inside a stocks and shares ISA are commonly PFICs too. Individual shares in trading companies are usually not, although a foreign company that is mostly passive can be one. The label attaches to the fund and not to the account that holds it.
Each PFIC is reported on its own Form 8621, under one of three regimes. The default excess distribution regime spreads gains and large distributions back over the holding period, taxes them at the highest rate for each year, and adds an interest charge. A qualified electing fund election taxes the shareholder's share of fund income annually, but needs a statement from the fund that most UK funds do not provide. A mark-to-market election taxes the annual change in value of marketable stock as ordinary income.
Form 8621 carries no standalone monetary penalty, but failing to file keeps the statute of limitations open for the whole return. There is a de minimis exception: where total PFIC holdings are below $25,000, or $50,000 on a joint return, and there were no excess distributions or disposals, Part I reporting may not be required. PFICs held inside a UK pension that qualifies under the treaty are generally outside the annual filing. An election made after the first year of ownership usually needs a purging step, so timing matters.
How we handle fund holdings
- 01
- Every fund, trust and ETF holding reviewed for PFIC status
- 02
- One Form 8621 per fund per year, under the right regime
- 03
- Mark-to-market and qualified electing fund elections assessed on the numbers
- 04
- Excess distribution and interest charge calculations where no election applies
- 05
- US tax treatment of a proposed fund checked before you buy it
Who this is for
Americans holding UK funds in a stocks and shares ISA
- Holders of UK unit trusts, OEICs, investment trusts or non-US ETFs
- People who inherited or were given a UK investment portfolio
- Filers whose earlier returns left Form 8621 off
Why US UK Tax Returns
Each return is prepared with the other country's return open beside it, so a credit, election or disclosure on one is supported by the other.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
Are the index funds in my ISA really a problem for my US return?
They usually are. A UK-domiciled index fund is a non-US company with passive income, which is what the PFIC definition describes, and the ISA wrapper makes no difference to the US. The practical cost depends on the size of the holding, how long you have held it, and whether an election is available. Small holdings may fall within the de minimis exception from annual reporting, though not from tax on a sale.
What happens if I sell a PFIC without ever having made an election?
The gain falls under the default excess distribution regime. It is spread evenly across the days you held the fund. The part allocated to the current year is ordinary income, and the parts allocated to earlier years are taxed at the highest rate in force for each year, with an interest charge on top. Losses are not treated the same way. The result depends heavily on the holding period and the size of the gain.
Is there a penalty for not filing Form 8621?
There is no standalone monetary penalty for the form itself. The consequence is procedural and can be more serious: while a required Form 8621 is missing, the statute of limitations does not start to run, generally for the whole return. Years you thought were closed stay open to examination. The same holdings may also belong on Form 8938, which does carry a monetary penalty.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
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