UK Stocks & Shares ISA (Account Options)

ISAs are a really interesting kind of account – there’s nothing even close to them in the US, where you can invest, allow your investments to grow tax-deferred, and then withdraw them whenever you want. Sadly, that means the IRS doesn’t recognize them as anything special – but I think they still have a place in the FIRE arsenal for Americans in the UK. They come in a few different flavors, but the Stocks & Shares (S&S) ISA is the best fit for long-term investing.

Synopsis

Strong UK tax advantages, but you’ll need to manage a portfolio of individual stocks to avoid PFICs. To the IRS, it’s just a taxable brokerage account, but that’s not so bad.

Priority

After UK pensions and US IRA – those both have tax advantages in the US and the UK, now we’re getting into accounts with only limited tax advantages.

Skip S&S ISAs if you aren’t comfortable with individual stocks.

You might pick a Lifetime ISA first over a S&S ISA – you get a 25% bonus from the government, but the money is locked up until age 60 except for a first home purchase.

Eligibility

All UK residents over age 18 – there are also slightly different children’s ISAs.

Many UK brokers won’t work with US citizens. The one I know for sure is Hargreaves Lansdown, since I have my S&S ISA with them. If you know of others, please put them in the comments and I’ll start to compile a list.

Investment Options

You can hold almost anything you want in a S&S ISA – mutual funds, ETFs, etc. However, unless you want to deal with the IRS’s painful and punitive treatment of PFICs, you’ll want to avoid them here.

  • I’ll do a longer post on PFICs in the future, the quick and dirty is that essentially all non-US mutual funds and ETFs are considered PFICs.
  • PFICs require labor-intensive reporting as part of your tax return, and have negative tax consequences.
  • There are options to reduce, but not eliminate, the pain – that’s fairly advanced, though. To me, it’s interesting, but not worth the hassle.

Therefore, if you want to avoid PFICs, you’re mostly looking at stocks in individual companies. These could be in the US, the UK, or anywhere you like. Individual bonds are fine too, although make sure you’ll get the information you need from the UK broker to complete your US tax returns, just in terms of recordkeeping. Personally, I’m keeping bonds to a bond fun in my IRA, and leaving my S&S ISA with just stocks.

This is not the place for high risk/high return shares. If you get a 100x return, the UK won’t tax you but the US will. Instead, this is a great place for big, boring companies, probably as a sort of pseudo-index.

  • I’ll do a more detailed post eventually, but my approach has been to pick 20 of the largest companies in the FTSE 100 and hold them in roughly equal value. It’s simple, and my rough backtesting indicates it’ll approximate the overall return of the FTSE 100. I chose UK-only just because my broker charges additional foreign currency fees and I can hold non-UK funds in other accounts, so I’ll just avoid that extra cost.

Risk & Return

Depends on the investments you choose. In general, individual stocks are a higher risk than a diversified index fund. Fully replicating an index is possible, but cost prohibitive due to the number of transactions – at a typical £10 per trade, you’d spend £1,000 to buy the whole FTSE 100 or £5,000 for the S&P 500, and the same again to sell it.

Withdrawal Options

This is where ISAs are massively different from a pension or IRA – you can withdraw all of your contributions and earnings at any time. No penalties, no UK tax.

US tax will be due on any capital gains and dividends as they occur, whether that’s through a withdrawal or transactions within the account.

Contribution Limit

£20,000 per year per person (2021), shared with all other ISAs. The year is the UK tax year (06 April to 05 April).

If your ISA is “flexible”, you can contribute, then withdraw, and then replace it in the same year without counting against your annual limit. If it’s not “flexible” (many aren’t), both contributions count. Quick example:

  • Flexible: You deposit £20,000 in your ISA. You need £10,000 and withdraw it. Later in the year, you replace the £10,000, leaving £20,000 (plus any gains/minus any losses) to grow from there. You can contribute another £20,000 next year.
  • Not Flexible: You deposit £20,000 in your ISA. You need £10,000 and withdraw it. Later in the year, you have the £10,000, but you aren’t allowed to replace it, leaving £10,000 (plus any gains/minus any losses) to grow from there. You can contribute that £10,000 next year, plus another £10,000 for the total £20,000 limit.

Fees

Three main ways you get charged:

  • An annual platform fee. This might be a flat rate, a percentage, or a capped percentage. Huge variations, and what’s best for you will depend on how big your ISA is.
  • Dealing fees (what an American might call a transaction fee). This is a charge per trade. Many brokers don’t charge fees for dealing in funds, but since you probably want individual stocks, you’ll be paying these. They vary somewhat, and some brokers offer lower rates if you trade more often – that’s probably not what you want to be doing if you’re trying to emulate an index fund, though! These can add up quick – £10 or so a trade is typical. There’s also sometimes a discount for recurring transactions via direct debit, instead of on-demand trades.
  • Fees on the underlying assets – if these are just individual shares, there’s nothing. If you’re investing in mutual funds/ETFs, there will be.

UK Tax Treatment – Contributions

All ISA contributions are from after-tax money, there is no tax impact.

UK Tax Treatment – Withdrawals

Withdrawals of both contributions and earnings are tax free. No income tax, no capital gains tax, no tax on dividends or interest.

US Tax Treatment – Contributions

The US treats this like a taxable brokerage account, so all contributions are made with after-tax money, no tax impact.

US Tax Treatment – Withdrawals

Since the US treats a S&S ISA like a taxable brokerage account, you’re liable for tax on all the same sorts of transactions. Capital gains when you realize them, interest and dividends when they’re paid, etc. This applies even if you don’t take the money out of the account and reinvest it.

This does include the distinction between short vs long term capital gains and qualified vs ordinary dividends. In short, it’s more tax efficient to save for the long term and avoid holding investments for only short periods. That also saves you on dealing fees, so good all around.

There may be options for tax loss harvesting – realizing a capital loss in order to offset capital gains.

Further Reading

MoneySavingExpert on ISAs

Monevator list of ISA providers – sadly, most of these won’t work with US citizens

7 thoughts on “UK Stocks & Shares ISA (Account Options)

  1. By the way, I’ve been looking again at which UK brokerages allow US citizens, resident in the UK, to open an ISA (or brokerage) account (other than the go-to favourite of Hargreaves Lansdown). HSBC InvestDirect has recently stopped existing US citizen clients from using online share-dealing, but still allows you to place trades over the phone (at online prices). This is unacceptable to me, so I’m in the process of moving an account to Hargreave Lansdown.

    The list of brokerages that I know do NOT accept new ISA S&S accounts include: Aegon, AJ Bell, Bestinvest, Chelsea Financial, Commshare, Degiro, EQi. Fidelity, Freetrade, Halifax, Interactive Investor, HSBC InvestDirect, iWeb, Legal & General, Lloyds, shareDealactive, Standard Life, Strawberry, Trading212, Vanguard, Willis Owen, X-O.

    These following companies “might” allow you to open one:

    – Close Brothers (not explicitly rejected in their terms, 0.25% annual platform fee)
    – Charles Stanley (terms have some weasel words saying they can’t offer an account if it’s in response to their website – so not sure how you’re supposed to open an account). 0.35% annual platform fee, capped at £240, or no charge for share holdings if you trade at least once a month at £11.50.
    – iDealing.com (I used to have Junior ISAs with them, and US citizens are not explicitly rejected, but I would not recommend them, as they are a very small company with many customers based in France, so they might be hit hard by Brexit rules)
    – IG UK (this is the only serious alternative to Hargreaves Lansdown). The IG terms do not explicitly block or allow US citizens, but my guess is that you would be okay. £96 annual platform charge, £8 share trades

    So my recommendation remains Hargreaves Lansdown. Annual platform fee for shares is 0.45%, capped at £45 (£3.75 a month), with trades costing £11.95. However, switching providers could take a looong time. My switch from iDealing to HL is at 10 weeks and counting…

    Liked by 1 person

    1. Thanks, excellent data points! I’ve been using Hargreaves Lansdown for a bit over a month now (will post an update on my S&S ISA experiment after the end of April), and am pretty happy. Those £11.95 dealing fees add up quick, but I’ve realised you can change your automatic monthly saving as often as you like, and those are just £1.50 each. So my plan will be to adjust each month to go into my preferred stock that month (keeping roughly equal cost weightings across the 20 I’ve picked), and only pay the £1.50. Eventually enough uninvested cash will build up that it’s worth doing a one-off £11.95 trade to get that invested, but hopefully that’s relatively rare.

      I also recently opened a SIPP with HL, that was similarly easy. Not planning on using it for now (the pension through my employer & Aviva is perfectly good), but wanted a small hedge in case the consultation on the pension age grandfathers in open accounts to stay at 55, instead of moving to 57. Just hoping I haven’t opened myself up for 3520/3520A pain on £100 in a SIPP in cash – will have a closer look at those closer to 2021 tax time and make a call.

      Liked by 1 person

  2. I’ve just check Aviva (funds only, so no good) and Barclays Smart Investor (terms say it’s okay, but I’ve just used online chat to confirm no US citizens are allowed.

    Yes, that automatic monthly investing trick works at AJ Bell as well. You just need to make sure you get your timing right and have the required money in the account on the date the trade will take place. Then of course remember to cancel or change it later. At least with AJ Bell you don’t actually need to trade each month this way. It’s bit of a faff, but savings are savings. I sure hope HL are pushed to lower their trading fee, but the company is raking in the assets right now so they probably don’t need to.

    I have my head in the sand regarding 3520/3520a for SIPPs and pensions that have personal contributions higher than employer’s. IRS Rev Proc 2020-17 is not directly supportive of SIPPs, but does imply that the IRS does not want to be burdened with reporting from retirement accounts that have been “approved” by a tax treaty. I suspect the IRS are happy with the ambiguity so that there is always an opportunity for them to go after the flagrant tax avoiders/evaders, but that means it still leaves the little guy on the hook for potentially punishing fines and/or annual professional tax filing fees. I would dearly love to see an example copy of a 3520/3520a filing for a UK pension. Perhaps if we saw a well-drafted example we could figure out how to file it every year. I doubt we’ll get our hands on one for free, because I’m sure the CPAs keep these close to their chest. I don’t want to experiment with filing one via an advisor just to get the forms, because that could send up a red flag at the IRS for every year I’ve held the pensions in the past…

    Liked by 1 person

    1. I hear you – I think I could probably figure out how to file a 3520/3520a for this SIPP, since it will probably make literally no money. But if I start doing it, I can’t very well stop, and some day, if/when I move my employer pension in, it will get a lot more complicated. Will just keep quiet about it for now…

      Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: