You are correct that as a green card holder you generally is considered an US resident for tax purposes and all your income worldwide is taxable in the US.
If the same income is taxable in the US and abroad - you will be able to claim a credit for foreign taxes paid on your US tax return.
The distribution from Individual Savings Account (ISA) is treated as a pension income. Your contributions are part of your Cost basis and only earnings are included into taxable income.
As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment.
US-UK tax treaty specifically exclude pensions paid from public funds, but not the type of payment you mentioned.
You may review tax treaty here - http://www.ustreas.gov/offices/tax-policy/library/uktreaty.pdf
and here are nice comments - http://www.uscib.org/index.asp?documentID=1940
Let me know if you need any help.
thanks for your reply and apologies for the delayed response. I'm clear on part 1 of your answer but wasn't entirely sure about point 2 so was hoping to clarify further....
I have read elsewhere that ISAs are treated as "Passive Foreign Investment Companies" rather than pension income as you mention - do you have any information relating to this please?
Thanks for any clarification,
An Individual Savings Account (ISA) is designed for the purpose of retirement savings with a favorable tax status for UK residents - similar to IRA accounts in the US (to be more précised - Roth IRA).
Thus the US-UK tax treaty - each Contracting State recognizes a pension scheme established in the other Contracting State - see also the tax treaty document referenced above - Article 18 Pension Schemes - which covers ISA accounts.
So if you transfer funds from your ISA into another ISA under UK rules - that will not trigger a taxable event in the US. See for instance this Memorandum which disallows transfers from UK tax deferred account into the US tax deferred account - http://www.irs.gov/pub/irs-utl/am2008009.pdf
I am aware of discussions (while I disagree that it is correct - unfortunately - there is no guarantee that in case of audit the IRS agent will take my side...) in which ISAs are treated as PFICs - for instance - http://britishexpats.com/forum/showthread.php?t=514993