PFIC: why US citizens avoid UK funds

A PFIC, a passive foreign investment company, is the US tax label for a pooled investment fund based outside the US. The definition is broad enough to catch nearly all UK and European collective funds: unit trusts, OEICs, investment trusts, and London-listed ETFs almost always qualify. If it is a non-US fund holding other people's pooled money, assume it is a PFIC.

Why the tax is so harsh

The US built the PFIC rules to stop Americans deferring tax inside offshore funds, and the default regime is deliberately unattractive. Gains and certain distributions are taxed at the highest ordinary rate rather than the lower capital-gains rate, and an interest charge is added as if the tax had been owed across every year you held the fund. The result can take a large bite out of a perfectly ordinary investment return.

The filing burden

Each PFIC generally needs its own Form 8621 every year. Hold a handful of UK funds and the annual filing alone becomes a real cost, before any tax. Some elections can soften the treatment, but they depend on the fund providing US tax information that most UK funds simply do not.

What US persons hold instead

The common answer is to avoid non-US funds altogether: hold individual shares, or US-domiciled funds and ETFs bought through a US-friendly account, neither of which is a PFIC. This is why a UK ISA or platform that only offers UK funds rarely helps an American, even when the account itself is open to you.

PFIC is the rule behind the stocks and shares ISA and brokerage pages.