pharmer9

Hello,

Maybe someone out there has something helpful to contribute to my dilemma.

A UK citizen, I built up an IRA while working in the US in the 1980s. Now 65, I have started to draw down on it.

I have made one partial withdrawal, and my US Financial Provider (Morgan Stanley) insisted on imposing 30% withholding tax, even though they have a W-8BEN on file and know the full story - residency, nationality etc

Does anyone know of any basis on which they can take this point of view?

Assuming they continue taking 30% wht, I suppose I can claw some of that back as Foreign Tax Credit. However, I don't think HMRC will allow the full 30%, 15% seems to be maximum (I can't find the relevant document on the HMRC web site: there used to be a nice table of countries and maximum allowable rates).

If so, is there any way to claim back the other 15% from the IRS? (In the same way as for example Switzerland withholds 35% on dividends, and you claim 15% as FTC and get the 20% from the Swiss FTA)

Thanks for any insight into this

pharmer9

Vadio

Someone else may have a better answer, but this is my initial thought.

Would you owe tax on the IRA distribution if you were in the US and this was your only income? If not, file a non-resident US tax return and claim a refund for the entire amount of the withholding.

I took a lump sum distribution a few years back, and there was no withholding. The bank asked (it was a CD) and I said no, and they complied. However, the total value of the IRA was only $3500 or thereabouts, and we didn't owe any US tax as our total income was well below the standard deduction.

pharmer9

Thanks Vadio -
The distribution was of $25,000, so even though some tax could be due in the US, I think it would be less than 15% overall - better than 30%!
I shall keep this on my list of possible ways to go.
pharmer9

Vadio

I would also file a new W-8BEN just for the heck of it. Could be that some office drone simply didn't have a clue. Alternatively, this might simply be Morgan Stanley's policy whether applicable or not.

pharmer9

Yes, I am tackling Morgan Stanley on this, quoting various bits of evidence. There is more to distribute so I am motivated to eliminate that 30%

Aoi

I suggest attaching a new W-8BEN to every request for a distribution where you are entitled to Treaty benefits. Then the distributions should be paid free of US tax in accordance with Article 17 of the US UK tax treaty which states: "1. a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State."

The Payer should issue a Form 1099-R which will show any US tax withheld. You can then file a US tax return to reclaim tax overpaid. I suggest using Taxact or similar tax preparation software if you are not sure how to fill out the forms.

The income will be taxable by HMRC. According to SA106 notes: "You can take 10% off the value of overseas pensions, annuities and social security pensions so that only 90% of the amount you receive is taxable in the UK."

The SA106 notes also state when you can claim Foreign Tax Credit Relief. I doubt that you can take a Foreign Tax Credit because foreign tax was not due according to the Tax Treaty.

pharmer9

Thanks Aoi, some clear thinking there!

pharmer9

J.JsOH

To the OP original question, I had the similar situation, a partial withdrawal from a 401(k).
The eventual result was that I was able to convince the account custodian that a 30% tax withholding was not justified and they accepted the W-8BEN as documentation.

My story: Living in UK, as UK citizen and naturalised USC, I had made previous partial withdrawals with no tax withheld, no problem.
Then I renounced USC and the next partial withdrawal attracted 30% withholding tax, even though I had lodged a W-8BEN with them immediately after renouncing. This situation was so rare to the custodian that their system did not accommodate it, especially the web based system where such a situation had not been programmed in, therefore they defaulted to the 30%. Only by discussion and mailing another W-8BEN with my application to withdraw did they concede my case.
My learning point for future is to include a W-8BEN with mailed applications.

Not in OP case of partial withdrawal, but I'll mention this for all potential future readers' situations. There is a situation where the provider is justified to withhold 30% in the event a full withdrawal is made. Full withdrawal is covered by paragraph 2 of Article 17. (I couldn't find a live link so the relative part is pasted below.

DT Agreement ARTICLE 17
Pensions, social security, annuities, alimony, and child support
1. (a) Pensions and other similar remuneration beneficially owned by a
resident of a Contracting State shall be taxable only in that State.
(b) Notwithstanding sub-paragraph a) of this paragraph, the amount of
any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the firstmentioned State.
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.

I have run foul of this with 30% wht applied to a lump sum of $3,000 that we thought was not worth taking partials and I could not at the time recall the lump sum rule. It was last year and I have not yet filed my UK tax return so an attempt to claim as Foreign Tax Credit is a yet to be discovered surprise. Ah well, but am expecting a clear run.

John

pharmer9

Thanks John - I can see I need to persist with the W-8BEN
And good idea to draw attention to the lump sum rule.
By the way, I see you renounced USC. Did you have professional help with that or did you do it all yourself. I have cursed my offspring with "accidental American" status and I was wondering about helping them renounce.

J.JsOH

Hi pharmar9, I did a DIY renounce, after much study, practice with the forms and the clarity that I would have relative simplicity of not being a covered US expat. Most supporting information and understanding was found over time by searching online.
It needed careful attention to detail and an understanding of terms and phrases of questions, but no more than having to fill in annual US tax forms -forever!
Renouncing wasn't a tax move on my part or even a rejection of USA, just a simplification of my life once I knew that I would not relocate back to USA.
John

garfro

Interesting JJ......I t chaps my hide too on the filing every year requirements
Question what about your social security. Do you lose that?
Garfro

Vadio

SS benefits are based on earnings/contributions for a minimum of 40 quarters, not on citizenship. You won't lose it.

pharmer9

US Soc Sec should be independent of your citizenship/residency. I "renounced" (officially) my green card but after a simple application process I am pulling a useful little soc sec pension based on 13 yrs work in the US during the 80-90s (more than I will get from the UK for almost twice that period of work

garfro

Thanks guys, I lived and worked in California for 28 years and became a citizen as I thought that I would lose my SS payments, so good to know
I may look into getting rid of it if that is the case...can't stand having to file taxes in a country I don't live in!!
Working on selling house and CGT is horrendous
Also cashed out 401k in full and got hit with 40k there
Garth

J.JsOH

garfro, no, we suffered no loss of US SS benefits as a consequence of renouncing USC.