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I inherited a SIPP in the UK: what are my options?

I inherited a SIPP in the UK: what are my options?

Old Jan 2nd 2024, 5:38 pm
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Default I inherited a SIPP in the UK: what are my options?

My mother passed away in September and left her UK SIPP (Self-invested personal pension) to my brother and me.

I live in the US (I've lived here for over 20 years, and don't intend to return to the UK), and am wondering if anyone in the group can offer advice as to what my options are.

I assume that if I 'cash out' my half of the SIPP, it will be heavily taxed in the UK, so I am thinking that I need to keep it as a pension, but somehow bring it over to the US.

If anyone has any advice to offer, I'd be grateful.

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Old Jan 2nd 2024, 7:25 pm
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Default Re: I inherited a SIPP in the UK: what are my options?

The UK rules are that if your mother was under age 75 at death then there is no inheritance tax. If 75 or older then UK tax is payable at your personal UK income tax rate. The UK allows you to take the proceeds as a lump sum, or to leave the funds invested within the SIPP and to take an income from it. Either way you will have to file a return with HMRC to calculate the tax due (unless she was under age 75 at death).

The US rules are that there is no US inheritance tax to be paid by a beneficiary (and non by the estate so long as your mother was not subject to US taxes which is unlikely). You will have to file Form 3520 if the proceeds exceed $100,000. Make sure you do that because the penalties for failing to do so are substantial.

Going back to the UK, you will have to check if the SIPP provider will allow a US resident to leave the funds invested in the SIPP. I don’t know the answer to that one, but ask them and see. If they won’t do so, then your only option is to cash out. There is no way to transfer a pension of any kind from the UK to the US.

If you can retain the funds within the SIPP then depending upon the value you will need to file FBARs, and Form 8638 (and possibly Form 3520) annually with your tax return. That is annoying but doable, but again the penalties for not doing so are substantial so make sure you take care of that if you leave the proceeds within the SIPP.
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Old Jan 3rd 2024, 5:42 pm
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Default Re: I inherited a SIPP in the UK: what are my options?

Thank you Glasgow Girl for the info. I’ve reached out to the SIPP provider to ask.
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Old Jan 3rd 2024, 6:17 pm
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Default Re: I inherited a SIPP in the UK: what are my options?

When you contact the SIPP provider, ask them if the SIPP remains in your mother’s name with you having withdrawal rights as a beneficiary, or if the proceeds get transferred into a new SIPP in your name. It probably won’t be the latter because in the last year or two it has become almost impossible for a US resident to open a UK based SIPP (although it is still possible to open an International SIPP).

If the former and the SIPP remains in your mothers name then you may have to report your portion of the account annually on Form 3520 as a beneficiary of a Foreign Trust, and you want to be sure to do that to avoid falling foul of those rules and incurring nasty penalties, so check into that. If it is a SIPP in your name you will need to report the account annually on an FBAR and Form 8938 with your tax return if you meet the relevant thresholds. You may have to file the FBAR and Form 8938 even if it remains in your mothers name if you have signature authority on the account, I don’t know for sure but you want to be sure to comply with all foreign reporting requirements, so check those requirements carefully.

A SIPP in your name does not need to be reported as a foreign trust, and although some would state otherwise, there is no guidance from the IRS on this; Form 3520 is a complex form and for that reason many of us with a personal SIPP do not report it as a foreign trust. I have never heard of any consequences in taking this approach.

Thinking about this there are numerous potential tax scenarios, more on that later.

Last edited by Glasgow Girl; Jan 3rd 2024 at 6:20 pm.
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Old Jan 3rd 2024, 6:24 pm
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Default Re: I inherited a SIPP in the UK: what are my options?

If the current provider will not allow you to keep it due to your US residency, don't rule out the possibility of transferring it somewhere else.

AJ Bell is one possibility, although they have recently introduced new language into their customer agreement which may exclude this. It is worth asking them. https://www.ajbell.co.uk/

MyExpatSIPP is definitely a possibility. https://www.myexpatsipp.com/
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Old Jan 4th 2024, 1:26 am
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Default Re: I inherited a SIPP in the UK: what are my options?

I think the US tax situation is actually quite complicated here because although the IRS normally considers an inheritance to be tax free to the beneficiary, I believe the IRS will consider your mother’s SIPP to be a foreign non grantor trust which means that you are the beneficiary of a trust distribution and not an inheritance. I could be wrong and hopefully there are others with more experience in these areas that can comment, but absent any input from those with hard knowledge in this area I would consult a professional because if I am correct that significantly changes the US tax situation.

A foreign non grantor trust allows withdrawal of principal tax free but taxes all growth as ordinary income upon withdrawal. The IRS has complex rules on withdrawals which essentially force you to withdraw all growth before principal. In addition a throwback tax applies compound interest charges to all growth not withdrawn in the year in which it was earned generally making it more expensive to leave the growth invested than it does to withdraw it annually. Thus there are no tax deferral advantages of such a trust (which is exactly what is intended). When a distribution is made it also requires reporting on Form 3520 which can be complex, and the trust is required to file an annual report to avoid further tax disadvantages. I don’t think a trust of this type allows the stepped up basis on assets upon death of the owner but could be wrong on that.

There appears to be three potential options open to you, each with pros and cons.
  1. Take the inheritance as a lump sum.
  2. Retain the proceeds within your mother’s SIPP and withdraw as required with beneficiary rights.
  3. Transfer into your own SIPP.
Option 1 would enable you to receive the original principal tax free, and would eliminate the hassle of all foreign account reporting (except for Form 3520 in the year in which you receive the proceeds). Tax will be payable on all growth within your mother’s SIPP but if the stepped up basis is applied that should be minimal, and even if it is not applied some of it will remain tax free.

Option 2 also provides for tax free principal withdrawals and allows you to withdraw as and when you choose instead of taking a lump sum. It does however force you to withdraw growth first and principal last, and the growth will be taxed. While the growth will remain tax free within the SIPP you will pay tax at ordinary income rates upon withdrawal, and the throwback tax will eliminate all of the tax free growth (and then some) if you do not withdraw it in the year in which it was earned. You will also have the burden of having to file Form 3520 annually which is not a minor task.

Option 3 will result in a normal SIPP (which is a foreign trust but a different kind of trust) and although it can grow tax free with no tax penalties for retaining the growth, it will result in 100% of all withdrawals being taxed as ordinary income. Therefore you lose the ability to receive the principal tax free. You will also have to file an FBAR and Form 8938 annually, but won’t have the requirement to file Form 3520. (I would prefer to do an FBAR and Form 8938 over Form 3520 any day of the week).

So, pros and cons. Personally I would take the lump sum and reinvest the proceeds in US assets and avoid all of the pitfalls associated with foreign accounts.

Last edited by Glasgow Girl; Jan 4th 2024 at 2:13 am.
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Old Jan 4th 2024, 8:40 pm
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Default Re: I inherited a SIPP in the UK: what are my options?

Assuming the brother is in the UK, another option might be for the brother to inherit all of the SIPP and you to inherit other assets of equivalent value.
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