SanDiegogirl

My husband and I , as UK citizens, moved to the US in 2000 leaving behind approved UK personal pension plans (similar to US IRAs) from our prior employment in the UK. We are now also US citizens (duel US/UK) and resident in California. The UK pension plans cannot be moved to the US but are covered by the 2001 US-UK Tax Treaty.

Under UK regulations, at the time of retirement, pension plan holders may take a tax-free lump sum distribution up 25% of the fund value. This is explicitly covered by the US-UK Tax Treaty, Article 17 paragraph 2 (Pensions, Social Security, Annuities, Alimony, and Child Support) - it says “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.” Under this clause the lump sum is NOT taxable in the US.

However Article 1 paragraph 4 (General Scope/Savings Clause) of the treaty says – “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.” Paragraph 5 of the treaty provides exemptions to this rule but does not explicitly exempt Article 17 paragraph 2 above.

Does anybody know if US Federal and California tax would be due on any lump sum that we took from the pension? Has anybody been through this process?

im9907620

You raise a good point and you will find that even CPAs are split on this. In fact there are IRS memo's which suggest that the lump sum is taxable. It's a difficult one which you would really expect clearer clarification on. One source of mine suggests that the treaty protocol was amended to stop USC coming to the UK and taking their US lump sums free, not really to penalise Brits taking their lump sums in the US.

Beware that if you decide to transfer your plans to an offshore QROPS - as many might suggest in the future - that where there is no US treaty with the QROPS provider country you will probably end up paying US tax on the lump sum distribution.

lansbury

We were in a similar position earlier this year with my wife's UK University scheme pension becoming due to be paid. She is a USC by birth and is a duel UK citizen as well.

We took considerable professional advice all of which said US Federal and Oregon State income tax would be due on the lump sum. Our CPA is well verse in the UK/US treaty he even employs a Brit GC holder who specializes in tax matters between the two countries and he was very firm in his advice it is taxable in the US.

SanDiegogirl

Thank you for your very informative advice.

So much to think about as retirement rears its head !!

SouthCarolinaAdvisor

Would these rules apply to an annuity too?

My client has an annuity with the Equitable Assurance Company "with-profits class" where he is listed as Grantee & Annuitant
- funded with single premium 8,000 pounds in 1984
- '09 yr end stmt shows "notional value of guaranteed benefits " 45k pounds & "transfer value" of $58k pounds
- Note on statement that retirement benefits must be taken by age 75
- All payments will be made after the deduction of tax under the PAYE system
- There is a tax free cash sum when retirement benefits are taken of 25% of your total fund - if you don't take it by age 75 you lose entitlement to this
- The most recent statement I reviewed gave the following options:
- Take a lump sum 25% distribution tax free of 14,260 pounds and a 242.57 pound pension per month
- Take a 324.68 pound pension per month

I've asked the taxpreparer and they have no clue

im9907620

If you mean will this 25% be taxed, then possibly - same comments as previous posters. Age 75 thing being abolished early 2011 under new UK govt. A US professional tax contact of mine has a very good guide on these 'rules'. Take a look at www.expattaxandlaw.com Though I have to say that he's probably of the view that the 25% lump sum isn't taxed

lansbury

There is one other point to consider about the lump sum and tax. Would being paid about $22000 in one sum in one year mean the recipient pays tax at a higher rate than normal if it was taxed.

If an annuity is treated the same way here that the IRS treats UK endowment policies, tax would only be paid on the profit. So hopefully they could deduct the original £8000 cost and only pay tax on sums in excess of that.

These sorts of things are way above most of us on this board and the person needs expert advice from someone verse in UK/US tax law.

dunroving

The number of times these issues come up on here, and the seeming absence of any posts from people saying they have managed to find such advice leads me to think it's almost nonexistent.

lansbury

The problem is I think that the advice is available but mainly from the large multinational firms who normaly deal with coperate clients. Therefore to the average person getting the advice costs more than the possible savings.

This is what the IRS says:-

General Rule: Treaties—Pension/Annuity Articles
As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment. Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country. In some cases, government pensions/annuities or social security payments may be taxable by the government making the payments. There also may be special rules for lump-sum distributions. You need to look at each treaty carefully.

It's part of this document http://www.irs.gov/businesses/articl...187083,00.html

lansbury

If you look at the tax treaty to me it seems clear lump sums are not taxable in the US. However our CPA was adamant they were, and one other we spoke to agreed, so we didn't push the matter.

Here is the relevant bit of the treaty.

Article 17
PENSIONS, SOCIAL SECURITY, ANNUITIES,
ALIMONY, AND CHILD SUPPORT
1. a) Pensions and other similar remuneration beneficially owned by a
resident of a Contracting State shall be taxable only in that State.

b) 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 firstmentioned State.

2. 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.

im9907620

It isn't non existent I can assure you.

Outside the big Accountancy firms - which only the really wealthy can afford at those rates - there is a small network of financial advisors/CPAs/tax attorneys versed in niche US/UK cross-border pension/tax/investment matters but unless you happen to have a substantial national presence or a large marketing budget then its difficult for the majority of clients, who need the advice, to find you in the first place. And even then good advice is not free and sometimes that advice is not what a client wants to hear!

It might not seem like it, but there is an awful lot of research and time spent by professionals trying to clarify these issues and also offer solutions, but the IRS tax code does not make it easy for anything outside of their borders

Michael

It appears that you may be able claim a foreign tax credit on your US taxes for the amount of taxes paid on a foreign pension/annuity.

If you live in the USA and receive a pension/annuity paid by a payor from a foreign country, you must claim your desired treaty withholding exemption on the form, and in the manner specified by the foreign government. If the foreign government, and/or the foreign withholding agent, refuses to honor the treaty claim, make the treaty claim on your income tax return, or other prescribed form, filed with the foreign country. Additionally, you may be able to claim a Foreign Tax Credit on your U.S. federal individual income tax return for any foreign income tax withheld from your foreign pension or annuity.

http://www.irs.gov/businesses/articl...187083,00.html

Sancho_p

As someone who works in the UK Financial Services industry, let me also add that there is an additional 'fly in the ointment' in that UK Financial Advisers will, almost unanimously, be unable to advise a UK policyholder who is now in the US. Quite simply, the Professional Indemnity Insurers will not offer cover for the US (because of the possible size of US Litigation settlements), and under Financial Services Authority regulations, you cannot give advice without holding approrpiate PII cover.

Peter Newton

Generally speaking, the "savings clause" of tax treaties trumps any of the other articles in the treaty unless specifically excluded. Unfortunately this usually means that lump sum payments received by US residents from UK pension schemes are taxable in the US.

It's also important to check whether individual states honor tax treaty provisions and I know that California doesn't honor tax treaties unless the treaty specifically refers to states as well.

BrianLR

As I am due to recieve a small UK Local Government Pension and Lump Sum next year and taking into account the above point that it will all be taxable in the US, which has been mentioned elsewhere in the USA Forum, I am considering opening up an additional 457b tax deferred account with my current US employer ( I already have a 403b) and paying the equivalent amount of my UK pension and lump sum over the next year when I receive this, thus obtaining a deferral of the equivalent amount of US tax to offset the US Federal taxes due on the UK pension and lump sum. Does that sound like a good solution or can someone suggest a better solution?