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Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Old Dec 27th 2023, 6:07 pm
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Default Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Hello,
I would like to claim an old UK pension, including a lump sum. The lump sum should be exempt from tax under Article 17, Paragraph 1(b) of the US-UK income tax treaty, but I know this has to be done in the right way on the correct forms with the correct wording to avoid expensive consequences. Has anyone resident in the US worked with an attorney or tax advisor that they can recommend?
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Old Dec 27th 2023, 7:09 pm
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Default Re: Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Originally Posted by JanetKF
Hello,
I would like to claim an old UK pension, including a lump sum. The lump sum should be exempt from tax under Article 17, Paragraph 1(b) of the US-UK income tax treaty, but I know this has to be done in the right way on the correct forms with the correct wording to avoid expensive consequences. Has anyone resident in the US worked with an attorney or tax advisor that they can recommend?
Not a recommendation because I have never used them but this might be helpful: https://www.castroandco.com/blog/202...this%20portion.

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Old Dec 28th 2023, 12:17 am
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Default Re: Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Most tax professionals have concluded that the UK 25% tax free lump sum IS taxable by the IRS, for US residents and citizens. A handful disagree, but those are a very small minority. When contacting one be sure that you understand the total cost involved because it will be very expensive. There is no guarantee the IRS will accept their position and if not there will be consequences in addition to a large bill.

Below is an extract from a post by Glasgow Kid back in 2020 (no relation to me) outlining how they won the tax free argument with the IRS. Here is the full link. UK Pensions related to UK/US Tax Treaty

You could use this as a basis to justify claiming that the 25% tax free lump sum is exempt from IRS taxation under the UK/US tax treaty, or perhaps follow Glasgow Kids approach which was to submit it as taxable income and then claim a refund after the fact (which seems sensible to me as it avoids the unpleasant consequences of the IRS not agreeing with your initial return).

If you are feeling lucky, and are willing to accept the consequences of failure I would follow Glasgow Kids approach. Best case with a professional will likely result in you losing a huge slice of any potential tax savings, worst case may leave you with no tax savings at all, but a large bill and penalties. It is notable that the few professionals offering the opinion that the lump sum is tax free from the IRS never provide any evidence to indicate success. In particular read the paragraph under Solution provided by CastroandCo in the link provided previously. It is vague to say the least, and if the IRS agreed with their position they would have said so because it would generate massive business for them. Personally, I think they taking the approach of try it on with the IRS, see what happens, and deal with it if the IRS rejects the argument. No doubt some such returns will skate through because they are not scrutinized or audited. So, again, how lucky do you think you are?


I wish to share a SUCCESS STORY with everyone. I also wish to apologize for not responding to a few private e-mails as I just signed into this forum just now after several years.
In 2016, I was a British Citizen but permanent resident (green card) of the US for >20 years.
I turned 65 years of age and claimed my UK pensions. In accordance with UK pension rules I opted to take a 25% Tax-Free cash lump sum plus a reduced pension from both my UK pension schemes.
As my wife and I were applying for US Citizenship at that time I decided to submit my UK Pensions as part of my total worldwide income in accordance with US tax laws. I did think of not including my 25% Tax-free lump sum in my 2016 tax return but did not want to take a chance of perhaps being audited and found that I tried to evade taxes!!!
Thanks to this forum I always believed that I should at least try and ask for a refund based on the US/UK Tax Treaty. So, in late 2018 (within 3 yr timeline) I decided to submit an Amended 2016 Tax return (1040 X) to the IRS with the following argument to support my position.

After reading the UK/US Tax Treaty I believe that my 25% Tax-Free Lump Sum amount should not have been subject to US Taxes. My position is based on the following key points:
Article 1, paragraph 5, subparagraph A has all the exceptions to the US savings clause. In that particular provision, Article 17, paragraph 1 is specifically exempted from the US Savings Clause. Pursuant to Article 17, paragraph 1, subparagraph A , the US will not tax the 25% partial distribution from a UK pension if that distribution is exempt under domestic UK tax law, which it is. This is the provision that exempts the withdrawl from US tax. The 25% tax-free partial distribution should not be confused with a lump sum. Lump sum is not defined in the UK/US treaty. The IRS definition of a Lump Sum Distribution (IRS Topic 142) is the distribution or payment within a single tax year of a plan participant’s entire balance from all of the employer’s qualified plans of one kind (eg pensions). The 25% UK Tax-Free partial distribution does not meet the IRS definition of a lump sum. While the term “lump sum” is often used in the UK to refer to 25% tax-free distributions, lump sum clearly takes on a different meaning in the UK as the complete pension has not been liquidated.
To summarize: As the IRS defines a lump sum distribution as taking the entire balance of a pension in a single year then the 25% UK tax-free distribution is not a lump sum and is therefore not covered by Article 17 (2) and is actually covered by Article 17 (1).
It took 6 months before I heard back from the IRS but around April 2019 I received a refund check (plus interest) from the IRS. I then submitted an amendment to my State and received a State Refund too. Please note that I only received checks with no letter supporting or refuting my position.
I am not a lawyer nor a tax advisor. Just a normal guy who decided to use the information provided in this forum to get taxes paid on my UK Pensions (25% Tax-Free Lump Sum) back from the IRS and State. I had nothing to lose and everything to gain so the effort was well worth it.

Last edited by Glasgow Girl; Dec 28th 2023 at 12:45 am.
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Old Dec 28th 2023, 10:19 pm
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Default Re: Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Originally Posted by MidAtlantic
Not a recommendation because I have never used them but this might be helpful: https://www.castroandco.com/blog/202...this%20portion.
That's an interesting position that company is taking, saying US citizens can avoid tax on the 25%. Even the interpretation put out by HMRC says if you are a US citizen it is taxable, and only non US citizens are exempt under the treaty from paying US tax.
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Old Dec 31st 2023, 8:42 pm
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Default Re: Seeking a Tax/Pensions Advisor to Negotiate US/UK Tax Treaty

Thank you for your advice. I will stop searching in vain for some nonexistent genius transatlantic tax advisor and accept that Uncle Sam will take a slice of my cash. However, I will talk to my accountant about maybe trying Glasgow Kids' approach with an amended return at a later date.

Happy New Year to you and everyone reading on this Forum.
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