gpc61

Hi
I was wondering if anyone can help me.

My sister is a US citizen and I'm a UK one. She is currently suffering from terminal cancer. She has an IRA worth around $600,000. My other sister (also an US citizen) inherits half and I get the other half.

What is my tax position. As far as I can see there is no IHT to pay in UK. But is the IRA treated as income? If so do I come under US or UK tax rules?

Seems a minefield.

Thanks for your patience.

gpc61

Anyone?? Or can you point me in the right direction.

Many thanks.

durham_lad

Hopefully someone more knowledgeable will come along but as far as I know there should be no tax implications in either country provided the transfer is done correctly.

The key is to make sure that your portion is transferred to an IRA in your name in the USA and the IRA must be titled as an inherited IRA. Then you have to start making withdrawals from the IRA based on life expectancy, and the withdrawals will be then be subject to taxes.

The brokerage the inherited IRA is transferred to can certainly help with the required distributions.

Here is an example of a calculator from Schwab

Beneficiary RMD Calculator | Charles Schwab

gpc61

Many thanks, but as I live in UK I would want the total amount moved to UK so am assuming USA would tax it as income or apply some withholding tax and I'd have to offset this against my UK tax bill. Trouble is that's pretty negligible.

durham_lad

I think you may need some better advice than I can give you, but I would try if possible to keep it in the US and bring it into the UK over a number of years otherwise you are going to be subject to UK tax on an income of $300k in a single year. (assuming the IRA was 100% funded with pre-tax money)

You may want to post this question over at the UK-Yankee site, in the US-UK Taxes forum. As a UK resident with no existing financial US accounts you may have to bring it over in one lump sum anyway, but since it is a retirement account it's possible that HMRC may allow 25% of it tax free. I really don't know.

nun

You a have 3 options.

1) Open an Inherited IRA and invest the money and start to take required minimum distributions calculated using standard IRS interest rates and your longevity expectation.

2) Open an Inherited IRA, but take all the money out within 5 years.

3) Don't open an account, just take the entire lump sum as cash.

For options 1) and 2) you would file a W-8BEN with the US fund administrator and claim exemption from US tax under the treaty. You'd get the money free of US tax, no need to file any other US tax forms, but you would have to file self assessments with HMRC and pay tax on 90% of your income as a foreign pension payment.

Option 3) is a lump sum payment and is taxed differently. That would only be taxed in the US...no UK tax due. So you'd have to file a US 1040NR in the year that you get the lump sum.

gpc61

Many thanks.

dunroving

If the OP lives in the UK, he may have trouble opening any sort of IRA, what with financial companies getting cold feet about that sort of thing of late. Or is the Inherited IRA a completely different kettle of fish?

durham_lad

I think it will very much depend on the company that currently holds the IRA.

nun

Vanguards literature for inherited IRAs has provisions for NRAs and asks them to submit a W-8 as proof of identity. They also say that they can refuse to open an account if they don't have sufficient proof.

This is an important issue for me as I have NRA beneficiaries so I'll ask about the policy.

nun

Well a quick call to Vanguard and they say that NRAs are able to open Inherited IRAs with them.

durham_lad

Thanks for the research nun, brilliant.