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Future US Pension/Investment to UK Tax Implications

Future US Pension/Investment to UK Tax Implications

Old Dec 25th 2015, 4:26 pm
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Default Future US Pension/Investment to UK Tax Implications

Hi,

I've recently (9 months ago now) moved to Boston, USA to start a new job (on a J1 visa). So far I've turned up a lot of useful information on these forums, thanks! There is a lot of threads about claiming UK pensions in the US, but not much about the other way around.

Pensions

My employer offers me two pension opportunities. The first is entirely paid by them, so it's kind of a no-brainer to take this one. They also offer a voluntary tax-deferred pension contributed to by just myself.

My intention is to return to the UK within 5 years, so I would be drawing these pensions in the UK one day (in about 35 years!). My questions are about the tax implications of doing this. I understand that the answer to these first questions would only be valid today and not potentially in 35 years (or 5 years for the stocks/shares question), but given that we can't predict the future, I'll have to base my decision on the status quo.

Will I pay UK and/or US tax on these pensions?

The tax deferred pension only really makes sense if the tax I would have paid now is greater than what I'd pay on it later. The idea is of course that my retired income will be less than my current income so overall I'd pay less, but I'm not sure how this will work out if I draw it from the UK.

Investments

If I invest in stocks and shares through a US based online brokerage account, how would the capital gains and income from those be taxed after I have left the US? Would I pay UK tax? US tax? both?

Thanks a lot!

Douglas
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Old Dec 25th 2015, 8:19 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Once in the UK then 90% of a foreign pension is taxable. For example if you have a US pension of $10,000/year then you will be taxed on $9,000/year.

As for investments in the US then choose investments that "report into" HMRC. Individual company stocks trading on the NYSE for example are treated like UK stocks trading on the London stock exchange. US Mutual funds will probably be treated as passive foreign investments so at a minimum, dividends and capital gains will be treated as regular income. ETF funds from Vanguard are mostly recognized by HMRC and treated the same as UK funds with favorable tax treatment for dividends and capital gains.

https://www.gov.uk/government/public...eporting-funds
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Old Dec 25th 2015, 9:17 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by durham_lad View Post
Once in the UK then 90% of a foreign pension is taxable. For example if you have a US pension of $10,000/year then you will be taxed on $9,000/year.

As for investments in the US then choose investments that "report into" HMRC. Individual company stocks trading on the NYSE for example are treated like UK stocks trading on the London stock exchange. US Mutual funds will probably be treated as passive foreign investments so at a minimum, dividends and capital gains will be treated as regular income. ETF funds from Vanguard are mostly recognized by HMRC and treated the same as UK funds with favorable tax treatment for dividends and capital gains.

https://www.gov.uk/government/public...eporting-funds
That's useful thanks. Any idea if the US will attempt to tax me as well? I know that for their own citizens they tax them when working abroad unlike seemingly every other country, so I'm concerned they will try and tax this as well.
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Old Dec 26th 2015, 2:57 am
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by dpwrussell View Post
That's useful thanks. Any idea if the US will attempt to tax me as well? I know that for their own citizens they tax them when working abroad unlike seemingly every other country, so I'm concerned they will try and tax this as well.
Assuming you don't get US citizenship, and that the rules are the same 35 years from now, the as a UK resident the US will not tax your US based pension distributions. The UK will tax 90% of them at your marginal income tax rate. FYI ROTH fund income will be tax free in both the US and the UK

US non-retirement investments are a bit more complicated. If you are UK resident you will have to pay UK tax on them. If they are UK non-reporting funds you will pay tax on dividends and capital gains at your marginal income tax rate. If they are individual stocks or HMRC reporting funds the the capital gains and dividends will be taxed as such in the UK and you can apply any UK capital gain allowance too. As the funds are in the US the URS will want to tax them as well. So you will have to apply the 15% treaty tax on US sourced dividends prior to paying the UK tax on the dividends. For the capital gains you can resource the income to the UK and take a foreign tax credit.
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Old Dec 26th 2015, 8:11 am
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Default Re: Future US Pension/Investment to UK Tax Implications

You are more likely to take a complete LSD the tax year after leaving the US. You'll get US tax relief at your marginal US tax rate, tax deferred growth and when you pay US tax on the LSD it will be after an exemption and with all of the lower tax bands. There will be no UK tax at all on an LSD.
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Old Dec 26th 2015, 11:28 am
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by Cook_County View Post
You are more likely to take a complete LSD the tax year after leaving the US. You'll get US tax relief at your marginal US tax rate, tax deferred growth and when you pay US tax on the LSD it will be after an exemption and with all of the lower tax bands. There will be no UK tax at all on an LSD.
Could you possibly explain that it layman's terms?

Thanks
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Old Dec 26th 2015, 11:31 am
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by nun View Post
Assuming you don't get US citizenship, and that the rules are the same 35 years from now, the as a UK resident the US will not tax your US based pension distributions. The UK will tax 90% of them at your marginal income tax rate. FYI ROTH fund income will be tax free in both the US and the UK

US non-retirement investments are a bit more complicated. If you are UK resident you will have to pay UK tax on them. If they are UK non-reporting funds you will pay tax on dividends and capital gains at your marginal income tax rate. If they are individual stocks or HMRC reporting funds the the capital gains and dividends will be taxed as such in the UK and you can apply any UK capital gain allowance too. As the funds are in the US the URS will want to tax them as well. So you will have to apply the 15% treaty tax on US sourced dividends prior to paying the UK tax on the dividends. For the capital gains you can resource the income to the UK and take a foreign tax credit.
Interesting, thanks. Would that tax paid on the foreign investments work out roughly the same after the IRS has taken their share, and I've paid less to HMRC?

I will look into a ROTH IRA.

D
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Old Dec 26th 2015, 3:45 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by dpwrussell View Post
Interesting, thanks. Would that tax paid on the foreign investments work out roughly the same after the IRS has taken their share, and I've paid less to HMRC?

I will look into a ROTH IRA.

D
That is what I expect, to pay less HMRC tax on my dividends and cap gains, and that won't fully offset the US taxes paid on those investments.

I have been doing Roth conversions for a number of years now otherwise the RMD's required from the IRA's after age 70 would be taxed at 40%.
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Old Dec 26th 2015, 3:47 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by dpwrussell View Post
Interesting, thanks. Would that tax paid on the foreign investments work out roughly the same after the IRS has taken their share, and I've paid less to HMRC?

I will look into a ROTH IRA.

D
Here's an explanation of the situation for your non-retirement holdings.

Invest FAQ: Tax Code: Non-Resident Aliens and US Holdings

There are usually some tax free allowances for capital gains and dividends, but as an NRA I think you don't get those. It's a complex area and if you are not a US citizen when you return to the UK I would take all your non-investment money/investments with you.
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Old Dec 26th 2015, 3:55 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by dpwrussell View Post
Could you possibly explain that it layman's terms?

Thanks
LDS = Lump Sum Distribution.

This is usually connected with retirement accounts and is covered in the tax treaty.

It sounds as if you will have two pensions....one paid entirely by your employer...is that a traditional defined benefit pension? and one that sounds like a 401k, 401a, 403b, or 457. If you can tell us a bit about those plans and your employer it would help. As the amounts will probably be quite small you might want to do a lump sum distribution at some time or you could just take income in 35 years time.
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Old Dec 26th 2015, 11:36 pm
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Default Re: Future US Pension/Investment to UK Tax Implications

Originally Posted by nun View Post
LDS = Lump Sum Distribution.

This is usually connected with retirement accounts and is covered in the tax treaty.

It sounds as if you will have two pensions....one paid entirely by your employer...is that a traditional defined benefit pension? and one that sounds like a 401k, 401a, 403b, or 457. If you can tell us a bit about those plans and your employer it would help. As the amounts will probably be quite small you might want to do a lump sum distribution at some time or you could just take income in 35 years time.
I am back in the UK for Christmas, so don't have the paperwork with me (seriously, Americans LOVE paperwork!), but the basic details are:

Harvard 2001 Staff Retirement Program
Harvard TDA Plan

Some details here: Retirement Benefits | Harvard Human Resources

Currently both of these are actually being invested in a Vanguard Targeted Retirement Fund. There are other options for the investment, but they all seemed pretty similar at the time I made the choice and I don't have those details with me.

Is that useful?
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