Introduction: Why a Long-Term Asset Fund Worries the IRS
A long-term asset fund is a UK-authorised, open-ended fund that invests at least half of its money in illiquid assets such as private equity, private credit, venture capital, infrastructure and property. Since 6 April 2026, British investors can hold one inside a stocks and shares ISA. For a UK taxpayer, that is a simple and welcome change. For an American living in Britain, however, it is the start of a US tax problem that almost nobody selling these funds will mention.
The reason is the passive foreign investment company regime. The IRS taxes US citizens and green card holders on worldwide income, and it treats most non-US pooled funds as PFICs. Consequently, a long-term asset fund bought through a London wealth manager, a platform or an ISA can trigger punitive US tax on sale, an annual Form 8621 for every year you own it, and an open-ended audit window if you miss the filing.
This guide explains how the regime works in 2026, how HMRC taxes each form of fund, why the usual PFIC escape routes rarely work here, and how to fix missed reporting. At TaxYork, we prepare US and UK returns for bankers, business owners and investors in London, so we see private markets allocations from both sides of the Atlantic.
What a Long-Term Asset Fund Is
The Financial Conduct Authority created the regime in 2021, and the FCA's announcement of its final LTAF rules set out the core design. The detailed rules sit in chapter 15 of the FCA's Collective Investment Schemes sourcebook. In short, a long-term asset fund must invest at least 50% of its property in long-term, illiquid assets, may borrow up to 30% of its net asset value, and deals no more often than monthly.
Moreover, investors in a long-term asset fund must give at least 90 days' notice to redeem. That notice period is the price of access to assets that cannot be sold quickly. It also matters for US tax, as you will see below, because it shuts off one of the main PFIC elections.
Why Americans Face a Different Answer
A British investor asks whether the fund will perform and whether it fits an ISA. An American investor must also ask how the IRS classifies the fund, which election is available, and what the annual reporting costs. Furthermore, the answer changes with the fund's legal form and with the wrapper you hold it in. As a result, the same fund can be harmless inside a UK pension and expensive inside an ISA.
How the Long-Term Asset Fund Market Works in 2026
The market has moved from pension schemes to private clients in three years. Understanding that shift explains why so many Americans are now being offered these funds.
From Pension Schemes to Private Clients
The first LTAF was authorised in March 2023, and defined contribution pension schemes supplied most of the early money. The Mansion House Accord of May 2025 then pushed further: the largest workplace pension providers pledged to put 10% of their default funds into private markets by 2030. Industry figures published in April 2026 put LTAF assets at about £7.3 billion across roughly 25 strategies. Therefore, many Americans already own LTAF exposure through a workplace pension without realising it.
Meanwhile, the FCA widened retail access. Under FCA Policy Statement PS23/7, each long-term asset fund became a restricted mass market investment. Firms must give risk warnings and run an appropriateness test, and unadvised retail investors must confirm that they hold no more than 10% of their investable assets in such products. Advised clients and certified high-net-worth or sophisticated investors face fewer limits.
The April 2026 ISA Change
The biggest shift came with the Individual Savings Account (Amendment) Regulations 2026, made on 9 March 2026 and in force from 6 April 2026. Before that date, the 90-day notice period meant an LTAF could only sit inside an Innovative Finance ISA. Now LTAFs qualify for stocks and shares ISAs and Junior ISAs, and holdings already inside an Innovative Finance ISA were treated as qualifying for the stocks and shares account. HMRC's guidance for ISA managers on innovative finance investments reflects the move.
For British savers, this unlocks tax-free private markets investing within the £20,000 annual allowance. For Americans, however, the ISA changes nothing on the US side. As we explain in our guide to the Innovative Finance ISA and US tax, the IRS does not recognise any ISA. Every long-term asset fund inside one is taxed exactly as if it sat in an ordinary account.
The Three Legal Forms
An LTAF must take one of three authorised forms. The most common is the open-ended investment company, or OEIC, which is a UK company with variable capital. The second is the authorised contractual scheme, or ACS, a co-ownership arrangement with no separate legal personality. The third is a unit-based authorised fund structure. Specifically, the form of a long-term asset fund decides both the UK tax treatment and, crucially, the US classification.
How HMRC Taxes a Long-Term Asset Fund
There is no special tax regime for LTAFs. Instead, each form follows the ordinary rules for UK authorised investment funds, which HMRC sets out in its Investment Funds Manual.
OEIC-Form Funds: Distributions and Gains
An OEIC-form long-term asset fund is exempt from UK tax on its own capital gains. Investors pay tax on distributions and on their own disposal. A fund mainly invested in equity-type assets pays dividend distributions, taxed in 2026-27 at 10.75%, 35.75% or 39.35% under HMRC's dividend tax rates. In contrast, a fund with more than 60% in interest-bearing assets, typical of private credit, pays interest distributions taxed as savings income at up to 45%.
Importantly, accumulation units do not escape. HMRC taxes the income retained in the fund each year as if it had been paid out. On sale, you pay capital gains tax at 18% or 24% under the current CGT rates, after the £3,000 annual exempt amount. Because a UK-domiciled authorised fund is not an offshore fund, the offshore income gain rules that we describe in our guide to reporting fund status for US investors do not apply.
ACS-Form Funds: Transparent for Income
An ACS-form long-term asset fund is transparent for UK income tax. Therefore, each investor pays tax on a share of the fund's income as it arises, whether or not anything is paid out. For capital gains, however, units in an ACS are treated as assets in their own right, so you pay CGT when you sell your units rather than when the fund sells an investment. Pension funds favour this form because it can improve withholding tax outcomes on overseas income.
Inside an ISA or a Pension
Inside an ISA, none of this UK tax arises. Likewise, a long-term asset fund held within a registered pension, including a SIPP, grows free of UK tax until benefits are drawn. The US answer differs sharply between these two wrappers, as the next section explains.
Why the IRS Treats a Long-Term Asset Fund as a PFIC
The US analysis starts with one question: is the fund a corporation for US tax purposes? If it is, it almost certainly meets the PFIC tests.
The Two PFIC Tests
Under section 1297 of the Internal Revenue Code, a foreign corporation is a PFIC if 75% or more of its gross income is passive, or if 50% or more of its assets produce passive income. A fund holding private equity stakes, loans and fund interests passes the asset test comfortably. Furthermore, the regime does not care that the fund is regulated by the FCA or that the underlying companies are trading businesses. For a non-specialist overview, Investopedia's PFIC explainer is a useful primer.
How Each Legal Form Is Classified
An OEIC-form long-term asset fund is a foreign company whose investors have limited liability. The IRS therefore treats it as a corporation by default, so it is a PFIC. The unit-based form almost always ends in the same place, because its manager can vary the investments and its unitholders have limited liability.
An ACS-form fund is harder. The US classification of a co-ownership scheme is less settled. If it counts as an entity with limited-liability investors, the default classification is again a corporation, unless the fund files an entity classification election to be treated as a partnership. Some managers make that election for US investors; many do not. Consequently, you must ask the manager in writing how the fund is classified. Where it is a partnership, the issues shift to partnership reporting, which we cover in our guide to UK limited partnership interests for American investors.
Lower-Tier PFICs Inside the Fund
Private markets funds rarely hold only direct investments. Instead, many invest through other funds in Luxembourg, Ireland, the Cayman Islands or the UK. Under section 1298, if you own a PFIC, you are treated as owning your share of any PFIC that it owns, with no minimum ownership threshold. As a result, a fund-of-funds long-term asset fund can make you the indirect owner of many lower-tier PFICs, each with its own Form 8621 and its own tax on disposals inside the fund.
The Default PFIC Tax and the Elections That Rarely Work
Once a fund is a PFIC, the default regime applies unless you make an election. For most LTAFs, the elections are not available in practice.
The Excess Distribution Regime
Under section 1291, a gain on sale is an excess distribution. The gain is spread evenly over every day you held the shares. The slice allocated to the current year is ordinary income. Every earlier slice is taxed at the highest ordinary rate for that year, currently 37%, plus an interest charge running from each year's due date. In addition, the 3.8% net investment income tax applies to the gain.
Notably, the favourable long-term capital gains rate of 20% disappears entirely. Large distributions receive the same treatment where they exceed 125% of the average of the previous three years. Therefore, a patient long-term asset fund investor who holds for eight or ten years, exactly as the fund intends, suffers the largest interest charge.
Why the QEF Election Usually Fails
A qualified electing fund election lets you pay tax each year on your share of the fund's ordinary earnings and net capital gain, preserving capital gains treatment. However, it requires a PFIC Annual Information Statement from the fund, as the Form 8621 instructions explain. Very few UK LTAF managers produce one. Moreover, fund-of-funds structures would need statements for each lower-tier PFIC as well. In our experience, a QEF election for a long-term asset fund is possible only where the manager deliberately serves US investors.
Why Mark-to-Market Is Shut Off
The mark-to-market election needs marketable stock. Treasury Regulation 1.1296-2 extends that definition to funds redeemable at net asset value, but only if they meet eight conditions. Among them, the price must be published at least weekly, and the fund must have no senior securities beyond de minimis debt. A long-term asset fund that deals monthly, requires 90 days' notice and may borrow up to 30% of its value will struggle to meet those tests. Consequently, most American investors are left with the default excess distribution regime.
Form 8621, FBAR and Form 8938 Reporting
The tax is only half the burden. The reporting is annual, fund by fund, and the penalty for missing it is an audit window that never closes.
Filing Form 8621 Every Year
Under section 1298(f), you must file Form 8621 for each PFIC every year you own it, even without a sale or distribution. There is a limited exception where your total PFIC holdings are worth $25,000 or less ($50,000 on a joint return) and you had no excess distribution. For a wealthy investor with a sizeable long-term asset fund holding, that exception rarely helps. Furthermore, each lower-tier PFIC can require its own form.
Critically, section 6501(c)(8) keeps the assessment period open until three years after you file the missing form. Therefore, an unfiled Form 8621 leaves your whole return exposed, not just the fund.
FBAR and Form 8938
An ISA or platform account holding a long-term asset fund is a foreign financial account. You report it on the FBAR through FinCEN's BSA E-Filing system once your combined foreign balances exceed $10,000 at any point in the year. Additionally, the account appears on Form 8938 once you pass the thresholds for taxpayers abroad: $200,000 at year end or $300,000 at any time for a single filer, doubled for joint filers. The IRS comparison of Form 8938 and FBAR requirements sets out the overlap.
The Pension Exception
Holding the same fund through a UK registered pension changes the picture. The Form 8621 instructions exempt a member of an arrangement treated as a pension fund under a US income tax treaty from filing Part I for PFICs held inside it. Article 18 of the US-UK income tax treaty also defers US tax on income building up in a UK pension. As a result, LTAF exposure in your workplace pension or SIPP is usually far less problematic than the same fund in an ISA. You still report the pension on the FBAR and Form 8938.
Case Study: A London Banker's Private Markets Allocation
The following illustration uses realistic figures to show how a long-term asset fund plays out on both returns.
The Facts
Emily is a US citizen working as a managing director at a London investment bank. She is an additional-rate UK taxpayer. In April 2026, on her wealth manager's recommendation, she invested £300,000 in the accumulation units of an OEIC-form multi-asset private markets LTAF. She placed £20,000 inside her new stocks and shares ISA and £280,000 in a general investment account. Her workplace pension default fund also holds LTAF exposure. The fund produces no US PFIC statement.
In May 2030, Emily redeems everything after 49 months. The fund has grown by 40%, giving a gain of £120,000: £8,000 in the ISA and £112,000 in the general account. For simplicity, assume an exchange rate of $1.35 throughout, so the gain is $162,000.
The UK Result
The ISA gain is free of UK tax. The £112,000 gain in the general account is taxed at 24%, giving UK capital gains tax of £26,880, or about $36,290, assuming her annual exempt amount is used elsewhere. Emily also paid UK tax each year on the income retained in her accumulation units in the general account.
The US Result
Under the default regime, the IRS spreads the $162,000 gain over 49 months. About 9%, or $14,700, falls in 2030 and is ordinary income at 37%. The remaining $147,300 is allocated to 2026 through 2029, taxed at 37% and carrying an interest charge of roughly $10,300. Before credits, the US tax is about $70,300, plus $6,160 of net investment income tax.
Section 1291(g) allows the UK tax on the general account gain to be credited. That credit removes about $36,290, leaving roughly $34,000 of US tax and interest, plus the net investment income tax. In total, Emily pays about $76,400 across both countries, or 47% of her gain. By contrast, had the fund been a US mutual fund or had a valid QEF election, the 20% capital gains rate would have been almost entirely covered by her UK tax. Her combined bill would have been nearer $44,600. The PFIC regime therefore costs her about $31,800.
What We Fixed Along the Way
Emily's first adviser had filed her 2026 return without Form 8621, believing the ISA sheltered the fund. We filed the missing form with an amended return, which closed the open-ended audit window. We also confirmed that her pension exposure fell within the treaty pension exception. Finally, we modelled a purging election under section 1298(b)(1), which would have triggered a deemed sale and restarted her holding period. Because of the short holding period, redemption proved cheaper.
Fixing Missed LTAF Reporting
Many Americans bought a long-term asset fund through an Innovative Finance ISA from 2023, or through a stocks and shares ISA since April 2026, without filing anything. The remedy depends on the facts.
If You Bought in 2026
If your first holding year is 2026, you have not yet missed a deadline. Americans abroad receive an automatic extension to 15 June 2027, and a further extension to 15 October 2027 is available. Therefore, file Form 8621 correctly with your first return, ask the manager whether it will provide a PFIC statement, and consider a timely QEF election if it will. Our team handles US tax returns for expats with PFIC schedules built in.
Missed Years and Non-Wilful Conduct
Where earlier years are affected and the income was not reported, the IRS Streamlined Filing Compliance Procedures usually provide the cleanest fix for non-wilful taxpayers living abroad. Alternatively, where you reported all the income but omitted the forms, the Delinquent International Information Return Submission Procedures may apply. Our guide to Streamlined filing with Form 8621 explains how the PFIC computations fit into a catch-up submission.
Reporting on the UK Side
Missed reporting also happens in the UK. Distributions and accumulation income from a long-term asset fund in a general account belong on your Self Assessment return, and a sale needs a capital gains entry. Therefore, a disclosure on one side should prompt a review of the other. Similar issues arise with UK private credit funds, which often sit alongside LTAFs in the same portfolio.
How TaxYork Can Help
We prepare US and UK tax returns for high-net-worth Americans in Britain, including those with complex fund portfolios. Our work covers the full PFIC position, not just the headline form.
Before You Invest
Before you commit, we review the fund's legal form, its US classification and whether the manager provides a PFIC Annual Information Statement. We then model the after-tax return against a US-friendly alternative. Moreover, we advise whether the ISA, the general account or your pension is the best home for the holding, as part of our wider cross-border planning.
After You Invest
Once you hold a long-term asset fund, we prepare every Form 8621, including lower-tier PFICs, alongside your FBAR, Form 8938 and UK Self Assessment. Where reporting has been missed, we prepare the catch-up submission and coordinate the foreign tax credit on both returns.
Conclusion
A long-term asset fund gives British investors tax-free access to private markets inside an ISA from April 2026. For Americans, however, the same fund is usually a PFIC, and the elections that make PFICs bearable rarely work. The monthly dealing, 90-day notice and borrowing powers block mark-to-market, and most managers do not issue the statement a QEF election needs.
Therefore, check the fund's US classification before you buy, prefer your pension over your ISA for this exposure, and file Form 8621 every year you hold it. Handled that way, a long-term asset fund remains a sensible private markets allocation rather than a costly cross-border surprise.
Contact Us
If you hold, or plan to buy, a long-term asset fund as an American in Britain, speak to us before you invest or sell. Book a consultation with our US-UK specialists. You can also email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about long-term asset funds for US citizens, green card holders and other cross-border investors in the UK. It does not constitute tax, legal or investment advice for your specific circumstances, and it is not a recommendation to buy or sell any fund. UK and US tax rules change frequently, and the case study is illustrative only. You should obtain professional advice based on your own facts before acting. TaxYork accepts no liability for decisions taken on the basis of this article alone.