Samxboy

Contemplating retirement and accessing my UK pension. Realizing that the '25% lump sum' will probably be taxed....someone tell me differently please. It appears one option (least desirable) is to return my greencard and opt instead for a B2. Was only ever intending to do the 'snowbird' bit anyway after retiring so not a problem 'per se'.........

Question: has anyone done this and is it relatively easy? I still have a UK home, bank account etc, along with my Florida home, bank account etc. It's just this tax issue which is stopping me doing what I want to do with my UK pension money. Just the thought of paying tax on something that is free back home is plain disagreeable!
I know others have gone through this tax issue debate and for all the discussions about options with taking smaller amounts over several years, the outcomes still appears to be the same.
I love living in the US, but not at the cost of a $60,000 tax bill.

MMcD

OK....I'll "tell you differently":
I believe the "tax-free" lump sum won't "probably" be taxed. It will *definitely* be taxed!

But I wonder whether that would result in a $60,000 tax bill, as you've suggested?
I suppose it might...but given the thresholds at which the various brackets kick in.....your 25% lump sum would have to be substantial to get socked for that amount.

Full disclosure...I'm really math challenged so am not suggesting you're wrong - but hope you're right before turning in your green card and later regretting what might turn out to have been ill-advised.

Here are the IRS tax thresholds for 2015. (That's the return you'd file next April were you to keep your green card and receive your pension lump sum before 31 Dec.):

IRS Announces 2015 Tax Brackets, Standard Deduction Amounts And More - Forbes

Also....(if you do become tax resident here) there are various deductions you might be able to take which could substantially reduce any tax burden.

so bottom line - do make sure you understand the tax implications before doing something rash.

I can't offer any advice re: B1 visa....sorry

ps: Just realized how/why your tax bill could easily reach that level....I hadn't factored in the additional income you'd be declaring...thought of deleting this entirely...but decided - well...at least you've got 1 (useless ;-) ) reply. Now perhaps you'll get some other, more helpful responses.....

nun

If you can take the 25% UK tax free amount in such a way that you can convince the IRS that it is a periodic income payment then it should be US tax free as well. This would give a substantial tax saving over the simple one time lump sum payment.

Samxboy

ps: Just realized how/why your tax bill could easily reach that level....I hadn't factored in the additional income you'd be declaring...thought of deleting this entirely...but decided - well...at least you've got 1 (useless ;-) ) reply. Now perhaps you'll get some other, more helpful responses.....[/QUOTE]

That's fine and thanks for replying. Although the taxes are excessive (versus $0 in UK), it's when you add up all the other costs with keeping a GC that I'm realizing it's just not worth it given my situation. At some point we would have sold up and moved back, as we don't want to grow old in the US with funds running low.
A B2 visa will allow me the same access, assuming there isn't any hassle getting one after a GC. No monthly healthcare premiums is a massive plus, other than a reasonably priced insurance policy purchased in the UK.
I'll definitely give it a lot of thought but bottom line is I didn't work for all those yeas for Uncle Sam to rob me blind!

Samxboy

Yes, that's worth looking into, and if the amounts were smaller I'd give it a go. What's the likelihood of this becoming more recognized as a factual position?

vulcan

I find myself in a similar position. I had a telecon with a tax officer at UK'S International Pension Center Wolverhampton. I have no other UK income other than state pension. I will receive 25% of a lump sum tax free and the balance taxed at 40 to 45%. However as a non UK resident I should complete an R43 to recover some of it through allowances.

I've not made any decision yet how to deal with my pension fund.

You can call the office and request a call back from a specialist tax officer. A free service and they will call the US. Have your list of questions ready.

Owen778

I think you might be confused. The discussion before yours is about taxation of UK pension lump sums by the USA. You seem to be talking solely about the UK tax position.

vulcan

"Contemplating retirement and accessing my UK pension. Realizing that the '25% lump sum' will probably be taxed...."

No tax is due to IRS. US UK TAX TREATY art 17.2

Yours
Confused

MMcD

1. But per the US/UK Treaty - wouldn't such periodic income payments have to be tax-free in the UK first - before the IRS could even consider recognizing them as such?
And although the entire 25% lump sum is tax free there - per the new rules which now allow for the payment of that same lump sum in discrete amounts - each separate payment (under these new rules) is, in turn, subject to 25% of it being tax free (the whole of each payment is not).
Or to put it another way....whatever the monetary amount - 1 and only 1 payment is 100% tax-free in UK. And 75% of the subsequent payments are taxable in the UK

2. And even if the above weren't the case (and I believe it is) - then following the "logic" of this periodic payment scenario - why not argue that all subsequent pension ( or annuity) payments are also tax-free - so long as they are always for the same amount, paid periodically?

Obviously that will never be acceptable Alas....
.


What do you think?

nun

If you take the UK tax free 25% over a number of years then under UK domestic rules 25% of your pension payments is UK tax free. As a US tax resident under 17.1 of the treaty there will be no UK tax due and you can argue that the portion that is UK tax free is also US tax free.

Only the portion of the payment that is from the UK tax free 25% would be tax free.

nun

I'm confused by this. If you are a US tax resident there is no UK tax on UK state or private pensions....if you live elsewhere the situation might be different.

vulcan

Speak to the tax office.

State pension paid to none UK residents is paid tax free. That is then subject to the rules of the country you live.

Lump sum payments from a private UK pension is taxed by the UK and tax free in the US.

Pension income private or state paid by the UK are subject to US tax unless it would normally be tax free if you were a UK resident.

Have a read of article 17 of the treaty. It's not too long or complex

nun

I was a little confused by your wording. As a non resident there'll be no UK tax on UK state pension, but US tax if you are a US citizen or resident.

If you also have a UK private pension and take it as a single lump sum but are a US tax resident, then 75% of it would be UK taxable and all of it will be taxable in the US and you'd have to take a credit in the UK for the US tax paid. This would seem to be an inefficient way to take the pension as it would put you into a high tax bracket for a single year. If you were to apply a 72T type withdrawal method to your UK pension you would have a good argument for the IRS that you could keep the 25% UK tax free allowance......of course getting the money out of a UK pension might be a good thing as they often have ridiculous fees.

Owen778

While it still makes no sense to me to ask HMRC about US taxation, I just read the article vulcan refers to. It does read as if the lump sum distribution should be tax-free.
http://www.treasury.gov/resource-cen...s/uktreaty.pdf

The explanation on the notes (p63) is interesting, though. 17.2 was added to prevent holders of US pensions taking temporary UK residency to avoid paying tax on lump sum distributions. The way it's worded, though, it should keep lump sum distributions from UK pensions tax free for US residents.
http://www.treasury.gov/resource-cen...ts/teus-uk.pdf

But then, of course, the saving clause kicks in (paragraph 1.4), and allows the US to ignore all of the treaty when it comes to US citizens and residents, except those parts listed in paragraph 1.5. 17.2 is not included in 1.5.

This, of course, is an example of why you should ask the IRS about US taxation, not HMRC.

nun

The saving clause allows the US to tax a lump sum taken from a UK pension. This is why the UK 25% tax free amount is taxed in the US and why it would be better if the IRS could be convinced that the pension is taken in periodic payments. In that case there is no UK tax and the UK 25% tax free amount would also apply to the US tax due.