Pension Lifetime Allowance and NT tax code
 

I am US resident and have an NT (no tax) code for withdrawals from my UK personal pension. I am likely to exceed my Lifetime Allowance. Does the NT code protect me from paying the UK taxes on the excess over my LTA?

Re: Pension Lifetime Allowance and NT tax code
 

Well, zero response to this topic. However, in case anyone is interested in the answer, I called HMRC and the answer is that the NT code does NOT protect against the extra taxes.

On another subject, the HMRC guy was adamant that the tax-free 25% lump sum is also tax-free in the US, quoting the tax treaty to me.

Re: Pension Lifetime Allowance and NT tax code
 

Whether the 25% is tax free or not has been debated for a number of years. The general consensus, it is taxable for a resident or citizen of the US. There is a "Savings Clause" found in the treaty which basically states that notwithstanding the treaty terms the US can ignore it unless it is specifically written into the treaty that the Savings clause will not apply. A lump sum payment is not specifically identified and therefore is taxable in the US. This position taken by the IRS is supported by a letter issued in 2008: https://www.irs.gov/pub/irs-wd/08-0024.pdf.

See letter below:
This letter responds to your request for information dated March 5, 2008. In your letter, you requested certain information about the tax treatment of a lump-sum distribution from a qualified U.K. pension scheme paid to a U.S. resident.

Under the Internal Revenue Code, the United States generally taxes its residents on their worldwide income, regardless of their citizenship or the source of their income. However, an income tax treaty to which the United States is a party could change the application of the law. The United States has an income tax treaty with the United Kingdom (the Treaty).

Article 17(1) of the Treaty provides that:

a) b)

Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

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 first-mentioned State.

Article 17(2) of the Treaty provides that:

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.

GENIN-111967-08 2

Although Article 17(2) provides that the Contracting State in which the pension scheme is established has the exclusive right to tax a lump-sum payment, Article 1(4) of the Treaty contains a “saving clause” that allows the United States to tax its residents and citizens as if the Treaty had not come into effect.

Article 1(4) of the Treaty provides that:

Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.

Article 1(5) of the Treaty provides a number of exceptions to the saving clause, but there is no exception for Article 17(2). Therefore, the saving clause overrides Article 17(2) and allows the United States to tax a lump-sum payment received by a U.S. resident from a U.K. pension plan.

This letter has called your attention to certain general principles of the law. It is intended for informational purposes only and does not constitute a ruling. See Rev. Proc. 2008-1, §2.04, 2008-1 IRB 7 (Jan. 7, 2008).

If you have any additional questions, please contact ------------------------at -------------------- -------.

Sincerely,

______________________________ M Grace Fleeman
Senior Technical Reviewer, Branch 1 (International)

Re: Pension Lifetime Allowance and NT tax code
 

Re: Pension Lifetime Allowance and NT tax code
 

Thank you. I should have mentioned that I am aware of the discussions in this forum and that is why I posted the HMRC position.