What is a PFIC and why should you care when moving from the UK to the US?

For individuals relocating from the UK to the United States, existing investment structures can give rise to unexpected - and often unfavourable - US tax consequences. Many common UK investment wrappers are treated very differently under US tax law, and without careful planning this can result in higher tax bills, complex reporting obligations, and inefficient outcomes.

In this article, we outline some of the most common UK investment structures and explain why understanding the concept of a Passive Foreign Investment Company (PFIC) is a critical first step for anyone moving to the US while continuing to hold UK-based investments.

What is a PFIC?

Broadly speaking, a PFIC is a non-US corporation that meets either of the following tests:

• Income test: At least 75% of its gross income is passive income (such as dividends, interest, or capital gains), or
• Asset test: At least 50% of its assets produce, or are held to produce, passive income.

While this definition may appear straightforward, its scope is extensive. From a US tax perspective, many commonly held UK investment vehicles - including collective funds, unit trusts, OEICs (Open-Ended Investment Companies), and ETFs (Exchange Traded Funds) - can fall within the PFIC regime.

Why does PFIC status matter?

The PFIC regime was introduced to prevent US taxpayers from deferring US tax on passive income earned through foreign investment vehicles. Once an investment is classified as a PFIC, it becomes subject to onerous reporting requirements and potentially punitive tax treatment.² 

In particular:

• Gains on disposal do not qualify for favourable US long-term capital gains tax rates (currently capped at 20%).
• Instead, gains are generally taxed at ordinary income tax rates, which can be significantly higher.
• PFIC dividends are taxed as ordinary income tax rates (up to 37%), unlike qualifying dividends from other investments, which are taxed at preferential rates of up to 20%.
• An additional interest charge may be applied to reflect the perceived deferral of US tax over the holding period.

This treatment can materially increase the overall tax burden and may also result in double taxation, particularly where PFIC investments are held in UK taxable accounts that do not align efficiently with the US tax system. ^1,3

As a result, identifying whether your existing UK investments fall within the PFIC rules is a critical step when planning a move to the US - an area where we at LGT US are able to provide support and guidance.

General Investment Accounts (GIAs)

One of the most common UK investment wrappers is the General Investment Account (GIA), referred to in the US as a brokerage account. A GIA is a taxable account by design, meaning that income and gains are not sheltered within a pension or tax-advantaged wrapper.

When PFIC-type investments are held within a GIA, the mismatch between UK and US tax rules can lead to particularly adverse outcomes. This may include punitive US tax treatment alongside UK taxation, with limited or inefficient relief for double tax.

That said, GIAs do offer advantages. They are highly flexible, have no contribution limits, and provide access to a wide range of investment choices. For individuals moving to the US, however, the key consideration is not the account itself but what is held within it.

Personal Pensions and SIPPs

Fortunately, the UK and the US have a bilateral tax treaty that provides for the mutual recognition of certain tax-deferred retirement accounts and pension plans. Where investments are held within a qualifying pension arrangement, such as a personal pension or SIPP, the PFIC rules generally do not apply.

However, there are still practical considerations. Not all UK pension providers are comfortable supporting US-resident clients. Common challenges can include:

• Providing flexible access to US residents
• Offering beneficiary pensions to US-based beneficiaries
• Supporting multi-currency investment options, including US-dollar-denominated portfolios to help mitigate currency risk

These factors should be carefully reviewed as part of any relocation planning.

Individual Savings Accounts (ISAs)

From a UK perspective, a Stocks and Shares ISA is an extremely valuable tax-efficient vehicle. Any growth, income, or gains within the ISA are free from UK income tax and capital gains tax, and withdrawals can be made at any time without triggering a UK tax charge.

However, for individuals who become US-connected, the position changes significantly. The Internal Revenue Service (IRS) treats ISAs as “look-through” accounts for US tax purposes. This means the underlying investments are fully taxable in the US, effectively eliminating the UK tax-free benefit. (4)

Unlike UK pensions, ISAs are not recognised under the UK–US tax treaty, meaning PFIC exposure becomes a key concern where the underlying holdings include UK funds or other PFIC-type structures.

At LGT US, we have the capability to manage ISAs for US-resident individuals, helping clients navigate these cross-border complexities while managing assets on both sides of the Atlantic.

For further reading, see our article: ISAs for US Citizens – Are They Worth It?

Conclusion

When considering a move to the US, there are many factors to address - but ensuring your investment accounts are structured correctly is essential to avoid unexpected and unnecessary tax liabilities.

At LGT US, we specialise in helping US-connected individuals obtain the appropriate advice and guidance when navigating UK and US investment and tax considerations. If you would like to discuss your circumstances or review your existing investment structures, please contact one of our specialist Wealth Managers here.

Sources:

[1] https://www.federalregister.gov/documents/2021/01/15/2020-27009/guidance-on-passive-foreign-investment-companies 
[2,3] https://www.greenbacktaxservices.com/knowledge-center/pfic/     
[4] ISAs for US citizens – are they worth it? | LGT

About the author

Callum Watkins Associate Wealth Manager

Callum is an Associate Wealth Manager at LGT Wealth Management US, providing wealth management and investment solutions to US-connected clients.

Callum holds a First-Class degree in Business Studies from the University of Manchester. Callum also holds the Level 7 Chartered Wealth Manager qualification, alongside the Level 4 Investment Advice Diploma.