nun

The OP is arguing that because the UK 25% tax free amount does not meet the IRS's definition of a lump sum then it can be treated as pension income and Article 17.1 applies and not Article 17.2. However, does a single 25% payment from a retirement account actually meet the IRS criteria for pension income from a non-qualified plan. I think the UK 25% free sum is a non-periodic distribution from a non-qualified plan.....as pension income must be periodic it's not obvious that Article 17.1 applies which raises the question of whether any non-periodic withdrawal from a UK pension account actually meets the criteria of pension income under the treaty?

The OP could have left the 25% tax free amount inside the pension wrapper and used it to buy a larger lifetime income or invested it for drawdown so they have a tax free basis in any withdrawals that meet the IRS rules for income. Doing either of those things would have put the OP on pretty firm ground to avoid US tax on the 25% UK tax free amount.

lansbury

I have found this from HMRC dated May 2016. The Lump Sum paragraphs at the bottom of page one seem to agree partly with the tax attorney in that since 2004 US citizens can be taxed on the lump sum. It says a US resident is exempt, a US citizen is not

https://www.gov.uk/hmrc-internal-man...elief/dt19876a

nun

Interpretation is everything......my inclination is that a single 25% cash payment from a UK pension plan, being non-periodic, is more like a lump sum than periodic income and so those that might have a US tax liability should do everything they can to give the UK tax free amount the characteristics of periodic payments and then claim a US tax free basis using Article 17.1

Cook_County

Under US domestic law an LSD is a complete distribution. Anything else is arguably periodic. I think this is the argument.


Now that we have flexi-access drawdown and UFLPS to think about as well as the traditional PCLS which the OP took, the answer is cloudier than ever before. This is why we need the attorney to look at her/his thinking in the context of today's UK pension rules to explain the logic.

theOAP

Does the basis in the pension (for US tax purposes), and how, where, and under what circumstances acquired, have any consequence on the calculation of the 25% tax free amount?

Full basis (entire history of employee + employer + growth contributions) vs. fully 8833 excluded? Partial basis? All pension accumulation made before becoming a US person? It's still the same non-qualified foreign pension.

Does the discussion of the 25% amount start from square one, with the basis being totally irrelevant?

nun

Periodic distributions are taken over more than a single year. A single payment or one that is made on demand is not a periodic payment.So I don't think that the UK 25% tax free amount is taken in a one time cash amount is a periodic payment. Setting up a regular drawdown plan would qualify as periodic payments.

nun

Stop making things even more complicated......

It's a good question for UK pensions with a US tax free basis....however it's probably not relevant to the OP as they are not a US citizen and their pension contributions were made while living in the UK....so there was no opportunity to build up a US tax free basis while resident in the UK and there has been no mention of paying US tax on the gains since becoming a US resident.

Dominic0012

I would like to resurface this debate.

The consensus is that the savings clause applied and art 1(4) makes the PCLS taxable.

I would like the debate to shift to who exactly falls under art 1(4) as per art 4 and specifically art 4(2)

For a green card holder my understanding is that normally the PCLS is taxable in the U.S. when they become a GC holder and live and work in the U.S.

It looks like that in the first year being dual status does not meet art 4(4)(b)

"he shall be deemed to be a resident only of the State in which he
has a permanent home available to him; if he has a permanent home available
to him in both States, he shall be deemed to be a resident only of the State with
which his personal and economic relations are closer (centre of vital interests) "

So what are your thoughts if someone has recently moved to the U.S. but does not meet the Substantial Presence Test for that year then they are also a U.K. resident in that year and are able to take the PCLS with no tax penalty.

Also it looks like a USC/green card holder may recieve the PCLS without penalty if they are not yet resident in the U.S.

Does anyone have any experience where the IRS has challenged a PCLS for a green card or USC?

ian-mstm

To what end?


Let's make it easier... why don't you give us an idea of what your specific situation is, what you'd specifically like to see happen, and what your specific questions are... and then, rather than debate the rules and someone else's hypothetical needs, you might actually get knowledgeable people who can help you with your specific concerns.

Of course, if you're simply curious... then let the debate begin!

Ian

lansbury

I'm not sure what the question is but the link in post #17 which gives HMRC view that only US citizens pay tax on a lump sum, US residents do not, might be the answer to whatever question is hidden in the post by Dominic0012

imacd

Greetings all. This is my first post on Britishexpats and I must say contains a treasure trove of information. I am so impressed with the regular contributors on this site, who are so willing to give freely of the considerable time it takes to offer help and advice to those of us in need.

I left the UK in 1996 due to marriage, but I am still a green card holder. I will receive a UK pension from TPS for my 12 years teaching in the UK this coming October. It consists of a UK tax free lump sum of $25,000 this October and there after $150 per month for life. I understand that living in the US, the tax free status of the lump sum may be a moot point.

I also barely understand that the status or type of pension will determine whether it will be taxed in the USA or UK according to the US/UK tax treaty. Teachers' Pensions are responsible for administrating the Teachers' Pension defined benefit Scheme on behalf of the Department for Education.

So does this mean that it is a UK Government backed scheme? If so, does this mean that by the treaty, it will only be taxed in the UK? In an earlier thread, Nun stated;
“If you are US resident, but not a US citizen, UK Government pensions are only taxable in the UK.”

How should I go about contacting or preferably convincing the IRS on this matter?

Also, if the lump sum is taxed by the IRS, because the entire UK pension is not taken as a lump sum but also as a series of periodic payments could I argue that it is taxed under Article 17.1 which is exempt from the saving clause and so 25% is tax free in the US?

Having ploughed through the epic 93 page thread on WEP, I think I largely get that, but this US/UK tax treaty stuff is a different beast, any answers to my questions and where to go from there would be much appreciated!?

Cook_County

Small question first...how have you been describing the Teachers' Pension Plan on your annual Forms 8938?

lansbury

Public service pension schemes | The Pensions Regulator There is a list of people who receive government service pensions at this link, second paragraph. Teachers are included.

For my police pension my CPA said that as I was not a US citizen the lump sum fell under the "can't be taxed in the US rule". I would take professional advice if you intend to go down that route, and not rely on what us well meaning amateurs might opine.

imacd

My wife(a US citizen) and I have always filed joint tax returns and since this teachers pension is worth a lot less than $100,000 the IRS does not require it to be entered on the form 8938.

Dominic0012

The main area which I do not think has been covered is residence and what actually constitutes a state to have taxing rights under the treaty in art 4

So the specific matter which i think is interesting is about the first year where an individual is dual resident of both the U.K. and the U.S. same year under the statutory residence test for the U.K. and the statutory residence test for the U.S.

If we are in agreement that the savings clause applies to an individual it seems that subject to art 4(4) of the treaty that the residence is determined by a series of tests

Also, the tax years in the U.S. and the U.K. are not concurrent so how do you go about determining residence under the treaty when the tax dates differ in a dual resident scenario?

For instance say a U.K. resident under the statutory residence for tax year 2017-2018 vested a U.K. pension on the 15th march 2018 (thier 55th birthday) who moved to the U.S. in July 2017 but had a main residence in the U.K. which they kept and has 3 significant family ties to the U.K. and stayed over 45 days in the tax year 2017-2018.

Would this be a viable strategy for someone who is approaching retirement age?