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Refund on US Tax paid on tax free uk pension lump sum?

Refund on US Tax paid on tax free uk pension lump sum?

Old Jan 18th 2021, 4:14 am
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Default Refund on US Tax paid on tax free uk pension lump sum?

I realize that there has been a lot on this topic already, but I didn't see anything about this specific question.

Back in 2018 I took the 25% of my private pension as a tax free lump sum in the UK. I moved the money to the US, reported it to the IRS and paid tax on it at the time. Now I read that under the UK tax Treaty there is a question as to whether it should have been taxable. My question is whether anyone has successfully filed an amended tax return to have the tax refunded, and whether there is any specific wording which should be used in such an appeal?
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Old Jan 18th 2021, 5:58 pm
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Default Re: Refund on US Tax paid on tax free uk pension lump sum?

Some argue that you can avoid taxation based upon the savings clause in the tax treaty. However this is the IRS’s statement on taxation of UK lump sums.

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.

Therefore having paid the taxes already, and assuming you were a US resident at the time, I would say that you have zero chance of getting a refund. You will however have a human re-examining you tax return for that year. So a lot downside and no upside.
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Old Jan 18th 2021, 7:35 pm
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Default Re: Refund on US Tax paid on tax free uk pension lump sum?

Originally Posted by reltub View Post
I realize that there has been a lot on this topic already, but I didn't see anything about this specific question.

Back in 2018 I took the 25% of my private pension as a tax free lump sum in the UK. I moved the money to the US, reported it to the IRS and paid tax on it at the time. Now I read that under the UK tax Treaty there is a question as to whether it should have been taxable. My question is whether anyone has successfully filed an amended tax return to have the tax refunded, and whether there is any specific wording which should be used in such an appeal?
Providing you are not a US citizen then a HMRC document states that the 25% lump sum is not taxable in the US. I can't remember how far back, I think at least a couple of years, there are posts by someone who appealed the fact they had paid tax on the lump sum. The IRS refunded the amount he claimed. Sorry I can't for the life of me recall the posters name of when it was, but it is in the BE archives somewhere.

ETA: This is the link to the HMRC document https://www.gov.uk/hmrc-internal-man...elief/dt19876a
Lump Sums

Under the old Agreement, a lump-sum payment from a pension scheme was taxable only in the country of residence. So if an individual moved from the US to the UK before receiving a lump sum from a US pension scheme, they would be taxable on the lump sum neither in the US (because of the treaty) nor in the UK (which does not tax lump sums anyway).

The new provision prevents this occurring by providing that a lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.

The provision preserves the exemption from income tax of a lump sum relevant benefit where it is paid by a UK approved pension scheme to a beneficial owner who is a US resident. However, Article 1(4) will apply in respect of US citizens as the provisions of Article 17(2) are not amongst those listed at Article 1(5). So the US are able to tax lump sums received by US citizens from UK schemes.

Last edited by lansbury; Jan 18th 2021 at 7:40 pm.
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Old Jan 18th 2021, 8:36 pm
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Default Re: Refund on US Tax paid on tax free uk pension lump sum?

Here is the link to the IRS’s position on the tax treaty, dated 2008. I don’t believe the treaty has been updated since July 19, 2002, although it was clarified on March 5th, 2003. If that is the case then the 2008 IRS position that lump sums are taxable by residents and citizens still stands.

https://www.irs.gov/pub/irs-wd/08-0024.pdf

At the end of the day the IRS will apply its own rulings. What HRMC thinks or states will be of no relevance to them whatsoever.

I would love to be wrong as I would rather like my lump sum tax free as well.

There is another tenuous argument to be made which is that if you received your lump sum as a series of equal regular installments then it is tax free under the tax treaty. But you would have to structure your payments the right way and be willing to file your taxes with the correct reference to the tax treaty and hope the IRS does not audit you and disagree.

Like I said, I would LOVE to be wrong and misinformed, but the IRS plays by its own rules.
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Old Jan 18th 2021, 9:37 pm
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Default Re: Refund on US Tax paid on tax free uk pension lump sum?

The HMRC web page was published in 2016, and has been updated this year, the IRS letter is dated 2008 and much water has passed under the bridge since it was written. As I said there is a post from a BE member who claimed back the tax he paid in the US on the lump sum, and the IRS refunded him. That was from my hazy memory around 2017/18. The OP should spend some time and search it out, it explained in detail the case he argued for the refund.

Whatever the IRS says, if one party to the Tax Treaty has a different interpretation to the other it calls into play the meaning of that part of the treaty. Which gives grounds to argue which is correct. HMRC state you have to both a resident and a citizen for the US the tax the lump sum, the IRS letter states one or the other. The IRS letter ends "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". Depending on how much tax the OP paid I guess decides how much effort it is worth on the matter, but an amended return and covering letter which could almost be a cut and paste from the HMRC web page isn't much to do.
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