Pulaski

Perhaps it was a government pension (pension based on employment by a government body) as they have their own set of special rules for applicability of income tax.

RSL

Green card holder gets the full benefits of the treaty (without losing the protection of those provisions covered by the savings clause) ONLY if the green card holder resides outside the US, or, in treaty parlance, can tie-break to being a UK resident. If the green card holder resides in the US, then they likely will tie-break to being US residents under Article 4 of the treaty, and in that case they are subject to the savings clause to the same extent as are US citizens.

I agree that a reasonable basis exists to take the position that a 25% distribution is not a "lump sum" for purposes of Article 17(2). But Article 17(2) was added to the 2001 treaty precisely to eliminate the ability of US citizens and residents from being able to receive tax-free distributions of large sums that did not constitute part of a series of roughly equal annual payments. The IRS might have written the tax topics when the UK required a distribution of the entire balance in order to obtain tax relief in the UK. The US Treasury may not be aware that the UK changed it rule to allow tax-free receipt of less than the entire balance. If made aware of this UK rule, the IRS / Treasury might update their position to say that the distribution of 25% of the account balance outside of a series of roughly equal annual distributions is a "lump sum". I do not think the IRS is precluded by the treaty from taking such a position, and I am not sure that they are precluded from adopting this position on a retroactive basis. Although I do think that the tax tip should be sufficient to preclude the imposition of penalties.

Yes, this is often the case.

Alan17

Just seen this thread bumped to the top of the list just when I was going to post a question.

I'm doing my annual retirement planning and noticed a few websites advertising that they could help fill in tax returns and put appropriate quote wording in there that references the US/UK tax treaty in such a way that the 25% lump sum from a SIPP can be claimed as tax free (not going to quote the websites, thats what Google's for).

Further search found an Ernest & Young report on updated IRS tax treaty clarifications dated April 2019. In that it states

Withholding on lump-sum pension payments Treaty tax rate on interest income Under certain treaties, pension distributions to a resident of one country generally are subject to tax only in the country where the recipient resides even if the pension was earned as the result of employment in the other country (Source State). Footnote (d) has been revised to clarify that certain treaties with pension articles do not reduce the withholding rate for lump-sum pension payments. It also cross-references footnote (ii), which has also been updated to provide the following specific withholding guidance for five treaty countries:1. Canada—The15% rate does not apply to al ump-sum payment
2. Italy—The exemption does not apply to lump-sum or severance payments received if the applicable past employment was performed in the United States while the recipient was a resident of the United States
3. Netherlands—The exemption does not apply if (i) the recipient was a US resident during the five-year period before the payment date, (ii) the amount is attributable to employment in the United States, and (iii) the amount is not a periodic payment, or is a lump-sum payment in lieu of a right to receive an annuity
4. United Kingdom—The exemption does not apply to a lump-sum distribution derived from a US pension plan
5. India—The exemption does not apply to alump-sum payment
The wording implies that UK based pensions are exempt as long as they're not from a US pension plan, which a SIPP definitely isn't. I'm no expert on tax matters but thats my interpretation. I looked up the referenced IRS clarifications and E&Y have pretty much copied it verbatim.

So, my question is not on the opinion of the rules, clarifications, etc. but simply has anyone tried this approach on their tax return with any degree of success ? I'm far enough away from being able to claim this 25% tax free sum that I can't test it for myself but would be interested if others have tried it. Given the timing of the IRS release (just after tax returns were due) I doubt anyone has done it for this year, but given this new information someone may want to refile.

Happy to be proven incorrect in my interpretation of US tax law and if so I'd go back to my significantly more straightforward day job of rocket science/brain surgeon.

Pulaski

The problem you have with the US tax return system is that you can pretty much put down anything you want and the IRS will pay out a refund based on your figures, no matter how daft they are, and unless you are audited you will never know if your computation is "correct" or not.

Alan17

lansbury

There are been several theories put forward on possible ways to avoid the tax on the 25% lump sum. To my knowledge no-one has followed any of those paths and been audited. I suspect some have been lucky enough to not attract an audit.

Glasgow Kid

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.

lansbury

That is very interesting Glasgow Kid. It is a shame the IRS didn't explain the grounds on which they calculated the refund, because IMHO if you were not a US citizen when the UK tax free sum was received, it wasn't taxable anyway.

Be nice if the IRS would for once put pen to paper and confirm under what grounds they paid the refund, so there was some sort of confirmation for future use.

Glasgow Kid

Lansbury - I agree. Perhaps they would have given me an explanation had I been rejected.
Reply from the IRS simply stated the following:
Refund due: $xx,xxx.xx
We made the changes you requested to your 2016 Form 1040x to adjust your:
* income exempt per tax treaty
* pensions and annuities
* tax credits
I got the check a few days later in the mail

A few additional personal comments:
1 - At least I feel I did the right thing and paid the tax initially because I was very concerned about the legal aspects. Now, if I'm audited then I have nothing to fear as I was upfront and honest.
2 - I'm not sure if being a Permanent Resident v a US Citizen made a difference. Perhaps, like someone said before - it just depends upon the IRS agent that you get?
3 - I did not pay for legal advice. One lawyer I contacted wanted $500 per hour and another wanted 50% of the money refunded. I did it myself and saved thousands of dollars.
Last but not least the opinions given in this expat forum provided me with the information and argument I need to win my case.
Thanks to all.

lansbury

You are to be commended for taking the matter to a successful conclusion. It will act as a guide, and encouragement, for others to make a similar claim


When researching this before I came across a document put out by HMRC, which somewhere in a post on BE I linked to, which says if you are not a US citizen the UK tax free 25% is not taxable in the US. If you are a US citizen it is taxable. Never could find a comment from the IRS to support the HMRC view point.

Alan17

Appreciate the long and detailed response. As others have been quick to point out unless you get audited nothings 100% certain but good to see someone has tried (and succeeded).

MidAtlantic

Glasgow Kid appears to have followed the advice given here: https://www.castroandco.com/blog/201...of-uk-pension/

The key seems to be not to refer to the 25% as a "lump sum" but as a partial distribution and make the claim under Article 17 (1).

Well done Glasgow Kid

klwilliams

Did you have to pay the US tax on the UK lump sum ?

Pulaski

Please read post #97, the answer is given there. Indeed I would suggest that the answer to your question is the reason that post #97 was made!

bobbyleo

Hi. I am a dual US/UK citizen resident in the UK and have just withdrawn (2020) 25% of my UK Police pension. Is the 25% taken on a government occupational pension subject to different provisions and exempt from IRS tax or is that wishful thinking


Thanks.