DrRick

I know this has been discussed in the past but I understand the tax treaty agreement rules have changed last year or the year before possibly..so apologies...a slightly lengthy question Im afraid but may well apply to others

After working is USA we returned to UK leaving a 401K..circumstances:
We are both British citizens and are now resident in UK
We gave up green cards when we left USA some years ago..I am now retired age 66.

The 401k is now a substantial sum. I sold $150.000 in the 2016 tax year and was subject to 30% witholding (my fault ..I had never provided a WBEN8..but I anticipate getting a refund from IRS)

I planned to make similar sales in the next few years rather than all at once..to minimise ( I hope) tax

Am I right that UK tax on such withdrawals gives me 25% allowance and then I am taxed at my marginal tax rate on the remainder?..simple as that ?

I need to put in a USA 2016 NR tax return to get a refund, will I be taxed in USA on this withdrawal? this is my only income in USA apart from a US state pension..is this taxed just like earned income?..
and finally is the SS pension taxable in USA and do I need to put a US return each year just for that..I understand I need to put it in my UK tax return as foreign income is that correct.

I really want to do this right..any advice would be appreciated..thanks in advance

nun

This all assumes you have given up the green cards and are not a covered expatriate.

No you don't get a 25% tax free sum on a foreign pension. Right now 90% of it is taxable in the UK......but that will probably be changing soon to 100%.

Under the treaty there is no US tax on a 401k withdrawal when made by a NRA living in the UK. So file the 1040NR, claim the 0% tax rate on the 401k withdrawal (Article 17), enter the tax withheld and claim it all back. By state pension is you mean a pension paid by a US state the that would be a Government pension and it is taxable in the US and in the UK because you are a UK resident and citizen. So you pay the US tax, enter 90% of it on your UK self assessment and use the US tax paid as a foreign tax credit on your UK taxes.

The US SS is not taxable in the US, but 90% of it is taxable in the UK.

DrRick

I cannot tell you how much I appreciate your reply.thanks a lot!

.though to hear that I will be taxed on 90% is bad news..is it taxed simply at my marginal rate after my pensions and some rental income I have?..no allowance for capital gain (for example) and no sort of tapered relief?

Secondly, you are right I mean a Government pension..it has been paid ( only started in Dec 2016 so not much history to go on!) with no tax deducted in USA..so as I understand it I just need to add 90% of it to my UK tax submission and pay tax as on my UK pension?
I suppose that if the 10% allowance disappears I guess this increases tax on any withdrawals by around 4.5% do we know when this might happen?

DrRick

also..since the tax will be around £250K do you have any ideas how I might reduce it?
Would becoming non resident for tax help..if so I have forgotten how long I need to be out and how many days I can come to UK?

nun

Pensions are taxed as income, they have nothing to do with capital gains

Yes, I would send a W-8BEN to each US pension administrator so that they know you are a NRA, living in the UK and that you are claiming 0% withholding under the UK/US Dual Taxation Treaty.

nun

Are you making large one time withdrawals? You'd need to be receiving millions to have a £250k tax bill.

DrRick

Thank you again..for your time and advice...
The amount remaining now is only $625K..even with 10% allowance I made the UK tax over £200K..around 40% ish...but I may be wrong!!( apologies I was a Dr not an accountant)
It seems to make little difference whether I take all in one year ( perhaps whilst the 10% still exists) or do it over a period of years..maybe I am missing something ??

nun

Well taking small amounts to keep you within lower tax brackets is a standard way to control your tax bill. Taking £150k in the same year will produce a large tax bill. At age 70 you will also have to comply with IRS RMD rules. i suggest you do a spreadsheet to optimize your withdrawals and tax as it relates you your other income.

DrRick

I cannot thank you enough..can I ask what the IRS IMD rules are?

DrRick

Its OK I googled it wrong as IMD not RMD..I know now..apologies

robin1234

theres a simple table that the IRS publishes - it shows the RMD for each year of age from 70 to 115 or something. Simply a percentage of the remaining balance in the account.

Aoi

However, if HMRC remove the 10% deduction off the value of overseas pensions, annuities and social security pensions (so that only 90% of the amount is taxable in the UK), it may make it more tax efficient to tick the Lump Sum Distribution of Total Vested Balance box on the Retirement Plan Distribution Request so that the pension is taxed in the USA instead of the UK.

This could be especially so for a UK higher rate taxpayer and if US tax rates are reduced as promised by the new administration:
Chart shows exactly how Trump's tax plan could affect you

For reference, Article 17 of the UK/USA DOUBLE TAXATION CONVENTION includes:
"2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State."

nun

Note that under the treaty Article 17.2 is not exempted from the saving clause. A lump sum (ie the whole balance according to the IRS) paid from a US qualified retirement plan to an NRA UK citizen living in the UK will be taxable in the US, but HMRC could also tax it, whether it is HMRC policy to do that is unclear. I don't think HMRC looks to apply the saving clause, but I'd double check.

DrRick

What is the "saving clause"..when you say HMRC "could tax it" ..how unclear is the policy?..what do you mean by HMRC "don't look to apply the saving clause"..how can I double check?.....sorry to be dim on this!

Paying tax in dollars rather than pounds on money that is still in dollars fells better since UK tax is higher now because of exchange although the number of Dollars is the same..!..appreciate everyone's help

nun

The "saving clause" is a paragraph in the tax treaty that basically says "we can ignore the treaty and just apply our domestic rules". It's a get out clause so the US can tax its citizens. However, the UK could also apply that clause and if it did then the lump sum would be taxable in both the US and the UK. The zeitgeist is that the UK does not apply the saving clause, but I'd double check with a professional or write HMRC a letter as it's an area where a strict reading of the treaty might not give the correct answer.