DualMomma

Back story: husband and I moved to the US in 1995 from the UK. Became citizens in 2006. The US is our domicile of choice and we have not resided in the UK at all since 1995. Husband and I both had personal pensions opened in the mid-1980's which were dormant from 1995 until we rolled them into SIPPs with AJ Bell last year. Holdings are in cash in the SIPPs.

Unfortunately, my husband passed away in March this year. He had not taken any distributions from the SIPP, was under 75 and has not exceeded the LTA. As the named beneficiary, I will inherit the balance in the SIPP tax-free in the UK. I understand, of course, that this will be taxable in the US (boo! hiss!).

I will be waiting until January to notify AJ Bell of his death and to take the proceeds from the SIPP (would kill me tax wise to take it this year). My question is: can AJ Bell pay me the proceeds in £sterling into my UK bank account? Or, will they have to remit it to the US? I would prefer they pay it into the UK account, and then I will transfer it myself to the US.

Second question: my SIPP is very small (around £26,000) and I am considering just cashing it in this year before I start claiming SS (in 5yrs). Thoughts on this? Is it possible to cash out completely? I want to take advantage of being able to still file with the IRS as "married filing jointly" - get the higher standard deduction, higher income threshold, etc. and avoid any WEP impact on my SS (I will be claiming my husband's SS as his is higher than mine).

I am trying to be strategic in getting the funds from the SIPPs so that I can minimize the taxes I need to pay... I know I'm going to have to pay tax, but by taking mine this year and his next year, I will be able to stay in the lower tax brackets as I can file as MFJ this year and next year I can file as Qualified Widow as I still have a dependent child in college.

Pulaski

Inheritances are not taxed in the US (except, IIRC, by a couple of states), or am I missing something?

Drawing your own SIPP is a different matter and will be taxable income.

DualMomma

I believe because it is a SIPP it is treated the same as an inherited IRA.

Cook_County

1. The rollovers into the SIPP will be reported at Line 5a and 5b of Form 1040. The US/UK tax treaty protects these from US Federal (but not necessarily State) tax, but not reporting.
2. The previous pensions plans plus the SIPs are reported on FBARs.
3. The SIPPs will be reported on Forms 3520 plus substitute 3520-As.
4. The previous plans are reported on Form 8938.

DualMomma

Thank you, Cook_County . Yes, the reporting is done.

My question is more about dealing with my husband's SIPP now that he has passed away. I intend to take the whole amount (as per UK law, I inherit the entire amount tax free as his spouse and beneficiary). However, as it is a SIPP my understanding that under US tax law it is treated just like an inherited IRA. Thus the payout will be considered a distribution and taxed accordingly.

I am assuming AJ Bell will just pay me a check in UK £ which I can deposit into my UK bank account and then transfer to my US bank as and when - is that correct or will they need to send it to me in the US? I will need to report the distribution as income on my US tax form for 2024 (I'll take it in January 2024).

Glasgow Girl

As you stated, you will have to pay IRS tax on the inherited SIPP but there will be no tax in the UK.

AJBell should be able pay the funds into your UK account so you can transfer them to the US at your convenience, and in fact they may initially insist upon transfer to a UK account (although you could challenge that if need be). You could take them as a lump sum, or leave them invested in the SIPP and take them when it makes sense tax wise, which could be in small amounts to to maximize other tax thresholds over a number of years, plus they will grow tax free while they remain in the SIPP. Something to think about, although of course you would still have FBAR reporting to contend with, and perhaps Form 8938 if you have other foreign assets.

Some good news:I don’t believe that a spousal pension is subject to WEP so you should receive that entitlement in full regardless of any foreign pension you may have, or inherited from your husband, which may factor into your decision to cash out the SIPP(s).

imacd

Sorry for your husband's passing. When claiming off your husband's SS, you may need to consider, Government Pension Offset, or GPO, rather than WEP which I believe would only apply if claiming off your own SS record.

DualMomma

As I will not be receiving a pension from a local, state or federal government, I think I'll be ok in this regard.

USADragon

Fortunately, GPO doesn't apply to foreign pensions.

DualMomma

I retained an international Tax Attorney to advise me on the taxation of the inherited UK SIPP. As my husband was under the age of 75 when he died, and I took afull distribution of the SIPP within two years of his death, the entire proceeds of the SIPP are tax-free in the UK.


Some information that may prove useful to others:


In the 12-page Tax Opinion Letter provided, the following was noted:

.....[several pages of introduction about the law, etc.]...."Under Article 17(1)(a) of the U.S.-U.K. Income Tax Treaty, pension distributions are taxable in the country of residence. However, if a person receives the entire pension fund in one taxable year, the country where the pension fund was established has exclusive taxing rights to the distribution under Article 17(2)......[more pages of legal blurb here]... .A distribution from a U.K. occupational and private pension is generally taxed in the country of residence. However, the U.S. is legally prohibited from assessing income tax on any tax-free distribution from a U.K. pension. Thus, the U.S. is required to respect the tax-free portion of any U.K. pension distribution under Article 17, Paragraph 1(b) of the U.S.-U.K. Income Tax Treaty.""Moreover, because treaty positions with regard to pension income are exempt from disclosure, and, in this case, DualMomma is taking a treaty position with regard to pension income, the treaty position is not legally required to be disclosed on IRS Form 8833. Lastly, because, pursuant to Rev. Proc. 2020-17, U.K. pensions are not required to be reported on IRS Form 3520 and Form 3250-A, DualMomma is not required to report the pension on such forms."

Conclusion

"Absent a change in DualMomma’s representations set forth herein, it is our opinion that the tax free lump- sum distribution from the U.K. pensions are excludible from the U.S. federal income tax return and not subject to disclosure on IRS Form 8833, Form 3520, or Form 3520-A."


This was a long legal Tax Opinion and part of my retaining the firm is that they would be responsible for producing my US tax return for 2023 and also indemnifying me. Note from the letter: "Our firm has agreed to fully defend the matters that are analyzed in this Tax Opinion at no additional cost to you if it ever becomes the subject of an examination. In the highly unlikely event, we are unsuccessful in defending the legal positions articulated in this Tax Opinion, [name of firm] has agreed to assume all legal liability for all tax penalties and interest."

It wasn't cheap! But, it will save me tens and tens of thousands of dollars in taxes.

Cook_County

I am sorry to disappoint you, but there is not a single US qualified tax lawyer or accountant in the UK who believes that Rev Proc 2020-17 applies to UK plans. This is a comment from one of the "Big 4" accounting firms:https://www.ey.com/en_uk/tax/how-to-...ient-in-the-us.

I have personally seen tax returns prepared by all of the best respected US tax practices in the UK, and all of them would disclose the position on Form 8833, plus of course Line 5 on page 1 of Form 1040. You are a US citizen, so the only part of the treaty that could be relevant (because of the saving clause) is 17(1(b).

As a UK based US tax professional, what I can say is that you are describing is a common set of circumstances. I can't see where a legal opinion was needed.

DualMomma

Thank you for your insights, I appreciate you responding. I'm a little confused by your response.

Am I correct in understanding then from your comments that the proceeds distributed from the SIPP will not be taxed in the US, but that they should still be reported on Form 8833, plus Line 5 on the 1040 and that clause 17(1(b) prevents the amount being taxed? And that this is standard procedure and I did not need to get the Tax Opinion? Or, that the proceeds are taxable in the US?

Cook_County

Whether 17(1)(b) can be applied to a US resident has been widely discussed previously in this Forum. Some good folks believe it can, others not. Some lawyers believe that a complete distribution is a lump sum - within 17(2), that you cannot access. Others argue 17(1)b) can take precedence. Your lawyer believes 17(1)(b) applies in your circumstances. This IRS letter, for example, does not assist your case: 08-0024.pdf (irs.gov).

DualMomma

OK. I suppose I will just have to see what happens when I file my taxes! I sincerely hope that my lawyer is correct in his belief! I can see, however, that the IRS letter 08-2004 does not help my case! Sigh! Why can't things be simple!

I wonder if the fact that I was a beneficiary and that it was an inheritance rather than a distribution to the account holder makes any difference? And that the contributions to the pension had never been deducted from US taxes (contributions to the pension were prior to coming to the US). Probably not! Who writes these convoluted tax codes anyway.... we need plain and simple, I tell ya!

durham_lad

If the SIPP was cashed in to the estate and you then received it as an inheritance then no US tax due and any UK tax would be paid by the deceased's estate, not the recipient. My wife has been in that situation.