Go Back  British Expats > Living & Moving Abroad > USA
Reload this Page >

25% UK pension tax free element

25% UK pension tax free element

Old Aug 12th 2021, 12:05 am
  #1  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default 25% UK pension tax free element

I’m sure it’s been asked many times but can anyone tell me what the situation is with bring the 25% tax free element of my UK money purchase pension to the US? (I’m a new US permanent resident)
Also, when I sell my primary home in the UK (I don’t own property in the US) and bring the funds to the US to purchase a home, will there be a tax implication?
I much appreciate any replies/ advice
scarey340 is offline  
Old Aug 12th 2021, 11:39 am
  #2  
BE Forum Addict
 
Joined: Aug 2013
Location: Athens GA
Posts: 2,041
MidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
I’m sure it’s been asked many times but can anyone tell me what the situation is with bring the 25% tax free element of my UK money purchase pension to the US? (I’m a new US permanent resident)
Also, when I sell my primary home in the UK (I don’t own property in the US) and bring the funds to the US to purchase a home, will there be a tax implication?
I much appreciate any replies/ advice
BRINGING/Transferring the money to the US is no issue. The question is whether you took the 25% before you became a US permanent resident. If you did then no problem. If you took it after becoming a US permanent resident then the prevailing view is that it is taxable in the US. Some take a different view, and there are lost of threads on it eg UK Pensions related to UK/US Tax Treaty

Last edited by MidAtlantic; Aug 12th 2021 at 11:42 am.
MidAtlantic is offline  
Old Aug 12th 2021, 1:49 pm
  #3  
Furby
 
Glasgow Girl's Avatar
 
Joined: Apr 2016
Location: St. Louis, MO.
Posts: 424
Glasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond repute
Default Re: 25% UK pension tax free element

The profits on the sale of your primary home in the UK will be subject to the same capital gains tax as a primary home in the US. They don't care where the property is located. If the gains are less than $250,000 (single) or $500,000 (married) AND you have lived in it for at least two of the prior five years then the profits are tax free. Any amount above these thresholds will be subject to Capital Gains Tax. If you have not lived in the home for two of the past 5 years then all profit is taxable, but the 2 years do not need to be consecutive. The general advice is that you need to complete the sale of your primary residence within 3 years of arriving in the US to avoid Capital Gains on all of the profit. In addition to Capital Gains tax, any taxable profits will be subject to state tax, and will be included in your AGI increasing the chances of being subject to the higher Capital Gains Rate, the Obamacare Net tax and various other gotcha’s that kick in as your AGI increases.

You also need to be aware of the tax on foreign currency gain associated with paying off a mortgage. In short, they calculate the value of the mortgage in USD using the original amount loaned and the exchange rate on that date (you can approximate that). When the mortgage is paid off (because of a sale or refinance) they recalculate the original mortgage amount in USD at the exchange rate prevailing on the date of pay off. If the USD amount at pay off is less than that calculated for the date the mortgage was originated then the difference will be considered ordinary income and subject to tax. This will apply if the USD has weakened against the GBP since the mortgage was taken out.
Glasgow Girl is offline  
Old Aug 12th 2021, 10:41 pm
  #4  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default Re: 25% UK pension tax free element

Thank you, Mid Atlantic and Glasgow Girl. It’s clearly a minefield and as it’s too late for me to bring money from either property sale or 25% tax free lump sum prior to GC status, I’ll need to look carefully at the best way to bring my hard earned cash from Blighty. At least it seems that the sale of my primary home in the UK will be free of CGT, that’s a relief!
im sure it’s all worth it in the end, I say that as I stare out of a rain stained window on an august evening in the UK!
Thanks again for taking the time to reply
scarey340 is offline  
Old Aug 16th 2021, 3:02 pm
  #5  
BE Forum Addict
 
Joined: Aug 2013
Location: Athens GA
Posts: 2,041
MidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond reputeMidAtlantic has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you, Mid Atlantic and Glasgow Girl. It’s clearly a minefield and as it’s too late for me to bring money from either property sale or 25% tax free lump sum prior to GC status, I’ll need to look carefully at the best way to bring my hard earned cash from Blighty. At least it seems that the sale of my primary home in the UK will be free of CGT, that’s a relief!
im sure it’s all worth it in the end, I say that as I stare out of a rain stained window on an august evening in the UK!
Thanks again for taking the time to reply
Take a look at Wise (previously known as Transferwise) to move your money from the UK to the USA. There are many other money transfer firms, and they invariably are much better value than the mainstream banks. There are no tax implications, but you may be asked about the source of the funds if you are moving a large sum.

You refer to bringing money. If you literally mean bringing money on your person note that you have to declare any sum in excess of $10,000.
MidAtlantic is offline  
Old Aug 17th 2021, 8:08 am
  #6  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default Re: 25% UK pension tax free element

Thank you for your message Mid Atlantic. In the past I’ve used currency fair, I guess they’re all much of a muchness.
Going back to the question of bringing ones 25% tax free lump sum, I would imagine that if would be difficult for the IRS to know exactly where the funds actually originated from in the UK, large sums from the sale of property, pension windfalls, inheritance etc all tend to end up in one place, maybe NS and I (for protection) so I’m guessing that if those funds come into the US to be used for property purchase and investments etc, it’s only a matter of whether or not the IRS investigate you individually….
scarey340 is offline  
Old Aug 17th 2021, 12:21 pm
  #7  
nun
BE Forum Addict
 
nun's Avatar
 
Joined: Aug 2004
Posts: 4,752
nun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you for your message Mid Atlantic. In the past I’ve used currency fair, I guess they’re all much of a muchness.
Going back to the question of bringing ones 25% tax free lump sum, I would imagine that if would be difficult for the IRS to know exactly where the funds actually originated from in the UK, large sums from the sale of property, pension windfalls, inheritance etc all tend to end up in one place, maybe NS and I (for protection) so I’m guessing that if those funds come into the US to be used for property purchase and investments etc, it’s only a matter of whether or not the IRS investigate you individually….
It's your responsibility to file you taxes honestly and correctly. I'm sure you are not going to commit tax fraud.

If 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 leave the 25% tax free amount inside the pension wrapper and include it in the periodic drawdown income so they have a tax free basis in all withdrawals. Doing that would allow the OP to see if the IRS would allow Article 17.1 to apply.

Last edited by nun; Aug 17th 2021 at 12:32 pm.
nun is offline  
Old Aug 17th 2021, 12:37 pm
  #8  
nun
BE Forum Addict
 
nun's Avatar
 
Joined: Aug 2004
Posts: 4,752
nun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you, Mid Atlantic and Glasgow Girl. It’s clearly a minefield and as it’s too late for me to bring money from either property sale or 25% tax free lump sum prior to GC status, I’ll need to look carefully at the best way to bring my hard earned cash from Blighty. At least it seems that the sale of my primary home in the UK will be free of CGT, that’s a relief!
im sure it’s all worth it in the end, I say that as I stare out of a rain stained window on an august evening in the UK!
Thanks again for taking the time to reply
Bringing the money to the US is not the issue. The issue is your US and UK tax status when you sold the property and took the UK 25% tax free lump sum. So, were you a US tax resident when did those things? If you weren't a US tax resident alien then there are no US tax implications.

Last edited by nun; Aug 17th 2021 at 1:32 pm.
nun is offline  
Old Aug 17th 2021, 3:52 pm
  #9  
Furby
 
Glasgow Girl's Avatar
 
Joined: Apr 2016
Location: St. Louis, MO.
Posts: 424
Glasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you for your message Mid Atlantic. In the past I’ve used currency fair, I guess they’re all much of a muchness.
Going back to the question of bringing ones 25% tax free lump sum, I would imagine that if would be difficult for the IRS to know exactly where the funds actually originated from in the UK, large sums from the sale of property, pension windfalls, inheritance etc all tend to end up in one place, maybe NS and I (for protection) so I’m guessing that if those funds come into the US to be used for property purchase and investments etc, it’s only a matter of whether or not the IRS investigate you individually….
If you took your lump sum prior to becoming subject to US taxes then your 25% tax free lump sum will not be subject to IRS taxation. Having a green card does not necessarily make you immediately subject to IRS taxation, there is more information here https://www.irs.gov/individuals/inte...d-ending-dates.

Assuming that is the case, going forward all you need to do is to declare your foreign income on your tax return each year, and all foreign accounts with your tax return using Form 8938 and on an FBAR (if you exceed the specified thresholds). This includes your pension plans if they have a stated value. Many people report their pension plan with $0 if there is no known specific value (as in a final salary company scheme) to be on the safe side. You can lose a LOT of your hard earned savings if you fall foul of these laws, and quite a few people have.

If you are or have been subject to US taxation and have not met the reporting requirements then you should do what you need to do to become compliant retrospectively, There are different ways of doing so depending upon your circumstances. Having tax issues can impact any plans to become a US citizen. Be aware that the IRS does not care if you were unaware of the reporting requirement, they will apply what can be quite draconian penalties regardless.
Glasgow Girl is offline  
Old Aug 18th 2021, 8:45 am
  #10  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default Re: 25% UK pension tax free element

Glasgow girl, thank you very much for your reply, I’ve looked closely at the IRS residency tests and I’m even more confused now!
I received my green card in Feb 2021 but I am still employed by a UK company paid in GBP.
as I see it, I won’t meet the substantial presence test this year or for the next 3 years until I retire,
(I effectively commute back and forth between the UK and US)
Until I retire, I’ll spend less than 100 days a year in the US, the rest of the time will be spent in the UK where I pay tax (PAYE) of travelling as a member of airline crew.
Where my confusion arises is whether you need to meet both the Green card test (I do) and the substantial presence test (I don’t) … or is it a question of meeting one or the other? The information in the IRS publication seems to contradict itself.
if I do ultimately fall into the “non resident for tax purpose” group, would I be right in thinking that I could take my tax free pension element (1st crystallisation event) whilst I’m still working and paying tax in the UK- and not have to declare it? (I appreciate that I have to declare any funds over $10000 brought into the US for money laundering purposes)
For the record, I want to do this by the book and not risk committing tax fraud at any point!
My sincere thanks for your time!
scarey340 is offline  
Old Aug 18th 2021, 12:16 pm
  #11  
nun
BE Forum Addict
 
nun's Avatar
 
Joined: Aug 2004
Posts: 4,752
nun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond repute
Default Re: 25% UK pension tax free element

OK we just need to align things in time. Have you taken the UK tax free pension lump sum yet or sold the house? If you have a Green Card now you are a US tax resident and must declare your worldwide income to the IRS. If you sold the house and took the lump sum before getting the Green Card you don't need to worry about those events for US tax purposes. If you have not done those things then you will have to include them on your US tax return when you do. Also if you have things like ISAs ie investment funds not inside a pension wrapper they should conform to US rules basically make sure the funds are US based so you can avoid PFIC rules. You'll also have to declare your foreign ie UK wages and claim the foreign earned income exclusion or a tax credit.
nun is offline  
Old Aug 18th 2021, 12:27 pm
  #12  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default Re: 25% UK pension tax free element

Thanks Nun, no, I’ve not crystallised my pension yet, nor sold my UK property, that’ll probably happen next year.

My question really related to a previous post -

“Having a green card does not necessarily make you immediately subject to IRS taxation, there is more information here”

I appreciate the requirement to declare earnings to the IRS and I’m making arrangements with a UK based specialist to do that.

on that note, does anyone have any recommendations for UK based US/UK tax specialists?
I’m looking at a company called XERXES in London right now.

Thanks again for your time
scarey340 is offline  
Old Aug 18th 2021, 1:02 pm
  #13  
Furby
 
Glasgow Girl's Avatar
 
Joined: Apr 2016
Location: St. Louis, MO.
Posts: 424
Glasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond reputeGlasgow Girl has a reputation beyond repute
Default Re: 25% UK pension tax free element

If you read the first two paragraphs in the link https://www.irs.gov/individuals/inte...d-ending-dates it is clear that if your Green Card was approved whilst you were physically present in the US you became a resident for taxation purposes on that day, and if you received it while outside of the US then you became/become a resident for taxation purposes on the first day you step foot in the US.

Therefore if you have been physically present in the US (even for one day) since you received your Green Card then you are are now a TAX resident and subject to taxes even if you do not normally live here.

If you have not yet been physically present in the US since your Green Card was approved you need to be sure that you do not fall into the trap of abandoning your Green Card which can be an issue if you are outside of the US for more than 180 consecutive days.

Last edited by Glasgow Girl; Aug 18th 2021 at 1:07 pm.
Glasgow Girl is offline  
Old Aug 18th 2021, 1:45 pm
  #14  
nun
BE Forum Addict
 
nun's Avatar
 
Joined: Aug 2004
Posts: 4,752
nun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond reputenun has a reputation beyond repute
Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thanks Nun, no, I’ve not crystallised my pension yet, nor sold my UK property, that’ll probably happen next year.

My question really related to a previous post -

“Having a green card does not necessarily make you immediately subject to IRS taxation, there is more information here”

I appreciate the requirement to declare earnings to the IRS and I’m making arrangements with a UK based specialist to do that.

on that note, does anyone have any recommendations for UK based US/UK tax specialists?
I’m looking at a company called XERXES in London right now.

Thanks again for your time
Take good note of Glasgow Girl's comment. It is good practice to get your taxable events sorted out before any changes to your tax residency status. So you should be able to work out if you are a US tax resident now and come up with some strategy to "efficiently" comply with IRS rules. You should realize that once you are a US tax resident your worldwide finances are subject to IRS rules. So wages, bank accounts, ISAs, pensions, insurance etc and that you can be liable for tax in both the US and the UK and need to figure out "who gets what". This is usually not a big financial hit, it's just a complicated pain in the rear.

Here is a link to a company run by a US/UK tax expert who posts regularly on forums like "uk-yankee.com"
American Tax Returns - US and UK Tax Experts Tel: 020 8946 0523

Last edited by nun; Aug 18th 2021 at 1:55 pm.
nun is offline  
Old Aug 18th 2021, 2:08 pm
  #15  
Just Joined
Thread Starter
 
Joined: Aug 2021
Posts: 9
scarey340 is an unknown quantity at this point
Default Re: 25% UK pension tax free element

Thank you for clarifying that. So I’m definitely a US tax resident and will need to work closely with a CAA in the UK to coordinate moving money.

Thank you for the advice relating to not abandoning my GC, I’m back and forth monthly so no issue there.

One more thought, if I were to use my 25% tax free pension withdrawal to pay off my mortgage, what would be the position with my UK savings which are currently in an offset account with my building society?
Currently, I owe around £230k and my savings are around £170k. My tax free amount from my pension withdrawal tax free will be about £260k, therefore, if I were to draw that next year and use it to clear the mortgage, I’d have around £30k left which would be taxable in the US, what would be the situation with my £170k savings?
I am of course willing to pay for this kind of advice and will do so, I just wondered if anyone has any experience to offer?

much appreciated
scarey340 is offline  

Contact Us - Archive - Advertising - Cookie Policy - Privacy Statement - Terms of Service - Do Not Sell My Personal Information -

Copyright © 2021 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.