6StringsMike

Hello - I am new to BE and would be grateful to learn of any recent or current experiences as to the liability for any tax due to IRS for the 25% partial payment (not lump sum) when received from a UK pension. I have read the US/UK Tax Treat Article 17 but don't see complete clarity. Also does anyone have any experience/success with claiming this income as tax free on IRS form 8833.
Thanks for any guidance or helpful comments.

Michael

john in oz

Try posting this on the USA forum as well - I can not help with US tax issues. :-)

6StringsMike

Thanks I wasn't aware I was on an Aussie site.

Michael

BEVS

Hi there SixStringsMike & a warm welcome to the wonderful world of BE.

Love the username by the way. It needs an avatar to go with the name ( the wee pictures you see underneath usernames)

You have landed in a vendor forum and I can quite see why as it does state Pension transfers and the like. However as John states, Gold Vision Financial Services is an Australian company which offers financial services to those UK migrants living in Australia.

What I can do is to move your topic ( which is called a thread) & your question into the USA forum.

Hopefully the good people of the USA will be able to help a little.

regards
BEVS
Site Lead

6StringsMike

Thanks so much BEVS for putting me straight and moving my thread over to a USA forum,much appreciated as this subject is complicated enough without me looking in the wrong place. I will get an avatar sorted.
Very Best Wishes

Michael

Disenchanted

Welcome Mike,

The 25% lump sum distribution is generally considered taxable due to the savings clause of the tax treaty and the "lump sum" label based on an IRS meaning of "lump sum" being the whole pension.

I don't think anyone has challenged it as of yet, so if you are going to be the one to try them I'm sure there will be plenty of people interested. It is too late for me, I opted not to take the 25%.

There may be some hope in that I believe under the new pension disbursement rules you can take periodic payments that have tax relief on 25% of the payment which should then be allowed by the treaty as it's no longer a "lump sum". I don't have the details of the new payment plans, hopefully someone else does.

I'm sure someone like nun will be along presently to elaborate on what little information I have provided.

Greg.

6StringsMike

Hi Greg,

Thanks for your comments. I does appear that much confusion lies with the partial payment 25% tax free being linked and therefore treated a la lump sum. I have noted the more flexible UK disbursement rules and the ability to take the 25% amount over several payments. I may elect this process and start with a small amount, claim the exemption within the treaty on IRS 8833 and see what happens. It should be very self evident to the IRS that this is not an action on a policy to avoid tax but merely a privilege that was in my case already established before I moved to the US.

Michael

Disenchanted

Agreed, I even explored the QROP in Malta option but decided that was not a good idea. I'm hoping that I can take advantage of the periodic payment with 25% tax relief even though my defined benefit pension matured 2 years ago, I'm hoping it's not something like the 25% lump sum option where you could only choose at the time the pension matured. It is currently in deferred status as I am not taking any payout yet. I probably have to put in place "not resident status" with HMRC and the pension trust before I start to draw on it, unless I leave it until I return to the UK.

6StringsMike

I am trying to keep this as simple as possible and believe the solution and support should be within the USA/UK Tax Treaty but it seems that wording is less than clear. Article 1 para 4 seems to infer that the resident's tax authority can tax as if the Treaty was not in place but this is then countered by para 5 which refers to Article 17 sub para 1,3 & 5 and where if benefits would be non taxable if the resident had remained in that country they should also be exempt in this case in the USA. I shall continue with my fact finding and perhaps no one case will be the same and maybe dependent on when the scheme was started etc. I am not discouraged.

Pulaski

The problem with "seeing what happens" is that it is unlikely that the IRS will even notice unless you are audited, so even if you are wrong you could still be challenged in a future year.

Nun has previously expounded at some length on the new options for the 25% draw-down, and how that might be seen by the IRS, IIRC about 6 months ago +/-.

lansbury

Are you talking about a private pension or a government service pension?

MMcD

You might find the following relevant to your quandry - especially discussion of 'The Savings Clause' which 'Nun' talks about in post #19 .....and then, fast forward to his posts this year eg #172,174.. etc.

http://britishexpats.com/forum/usa-5...-sums-737360/?

That thread was started well before the recent changes to UK pension regulations. (OTOH - US tax law as well as provisions of US/UK Tax Treaty remain unchanged (afaik).....).

I guess the relevant question is whether recent UK pension rule changes offer a legitimate (legal) path to circumvent/bypass the 'Savings Clause'.

Be our guinea pig
Keep us posted if you do take on that challenge......

6StringsMike

MMcD- Thanks for comments and helpful suggestion to past discussions. I accept that Article 17 gives the IRS the right to tax but I also suggest that Form 8833 gives us the opportunity to challenge and claim within the spirit of the treaty and the clear evidence that such policies/schemes were not established to encourage tax avoidance by an overseas agency. I am encouraged. I hope I am not being naive. I also think the more flexible spread of the 25% tax free UK payment disbursement policy gives one the very clear opportunity to demonstrate a clear 'non lump sum' and off course enables us to test the water in a modest way and therefore not risk all. I know I have a lot more hurdles to jump and will be pleased to pass my experiences and thoughts to this forum.

nun

The IRS doesn't care that your UK lump sum is free of UK tax. In he US it is fully taxable as a foreign pension payment. You can take the payment over a number of years and make an argument similar to the one that preserves the cross border tax free nature of the ROTH, but be prepared for some serious questions from the IRS.

FYI I would avoid all QROPS as a US resident. There are uncertainties and the quality and cost of the investments is dubious IMHO. There might be a reason to use something similar to avoid UK inheritance issues, but if you are at that level you should have your own advisors. Never buy a QROP from a salesperson after a bit of web research.

6StringsMike

Hello Nun- thanks for your comments. I am curious is your statement reference UK lump sum based on your direct experience or knowledge or your best guess as the the likely treatment by the IRS. My case is clearly not a lump sum total distribution and is either a 25% payment or several payments to this value. As of yet I have been unable to find any direct reference to a case/experience where the IRS denied the request for a tax waiver on such a payment. I can understand based on the past pension rules that one would not risk all by taking the 25% only to find tax to be payable in the US. The language on the Treaty Article 1 & 17 is extremely ambiguous to say the least and it is easily to be over taken by fear. I am not considering any other option like QROPS and accept that the IRS ruling is always going to be final. My gut tells me nothing ventured nothing gained with the hope that the IRS sees the fairness in the case rather than any avoidance of tax. This is a great debate and I appreciate all the feedback- thanks