Glasgow Kid

Hello All,
I just joined the Expats today and I need some help.
I am very confident that someone will know the answers to my question.

I am a 66 yrs old male and permanent resident of the US (>20 yrs)
As a British Citizen I worked in the UK for >20 yrs and claimed my UK Company pension on March, 2016 as I turned 65 yrs.
In accordance with UK pension rules I opted for the 25% tax-free "lump sum" and a reduced monthly pension payment.

I filed my 2016 on Feb, 2017 and did not include my UK pensions as I believed that they were tax free. However, I now understand that I will need to resubmit an amended US Tax return to include my UK pension plus complete a FBAR since the total amount >$50,000.

The UK/US Tax treaty is very complex and a US Tax attorney advised me that I do not need to pay US tax on the 25% partial distribution "lump sum" as this fall under Article 17, 1 (a) and/or (b) and not Article 17, 2 which covers lump sums and is subject to the Article 1 (4) under the Savings Clause.

However, my interpretation of Articles 17, 1 (a) and (b) are that I would be excluded from US tax if I were a UK resident - at least for the year 2016 when I received my payment.

My interpretation is not in agreement with advice from a US Tax attorney so I am totally confused and would appreciate any feedback on this very complex subject.

Thank you.

Pulaski

I believe your opinion is correct, and the subject has been debated at some length, along with other US-UK pension issues, in this thread which you may find useful.

Glasgow Kid

Thank you for your quick response but the thread you gave related to UK State Pension and I know that I will need to pay US taxes on this pension which I have just recently claimed in March 2017 and so will be subject to US Taxes for 2017.
My question relates to my 2016 Company Pension and more specifically the 25% UK Tax-free "Lump Sum".

Just to clarify further:
Article 17, 1 (a) states "Pensions and other similar remuneration beneficially owned by a resident of a Contracting State (I am US resident) shall be taxable only in that State (US) so I assume that I need to pay US taxes on my UK Pension

Article 17, 1 (b) states: Notwithstanding sub-paragraph (a), the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State (UK) that would be exempt from taxation in that other State (UK) if the beneficial owner were a resident thereof (UK) shall be exempt from taxation in the first-mentioned State (UK).
But I am a permanent resident of the US so again I think that I need to pay US taxes on my UK 25% Tax-free "lump sum"

Pulaski

That's just the thread title - in over 1,300 posts it meandered (it's the BE way ) and covered a LOT of pension-related topics, including, but not confined to, WEP and the taxation of lump sums.

lansbury

That is the first time I have heard a tax professional say the 25% taken as a lump sum is not taxable. When my wife and I took our pensions after we moved here, three opinions said it was taxable. In fact except on one pension we didn't take the lump sum but opted for the bigger monthly payment for that reason.

I believe you are correct as you took the 25% as one payment while resident in the US, it is taxable in the US.

Glasgow Kid

Lump sums are covered under Article 17, 2 and the Savings Clause overrides this - thus you will pay US taxes
But the UK/US Treaty does not provide a definition for Lump Sums.
The IRS definition (Topic 142) defines lump sum as the distribution or payment within a single tax year of a plan's participant's entire balance from all of the employer's qualified plans of one kind (eg pension).
The UK tax-free "lump sum" does not meet this definition and hence the argument that it falls under Article 17, 1 (a) and/or (b).
The US Tax attorney is stating that under Article 17 (b), my UK 25% Tax-free Lump Sum is not taxable to the US under the Treaty???

Pulaski

It has been debated much by people here on BE, notably by Lansbury and Nun, and they have reached the same conclusion. The stuming block is that in the US "lump sum" means "the whole lot", whereas the UK uses it to mean a chunk less than 100%. ..... The whole thing is ambiguous and there is apparently no case law on the subject.

Glasgow Kid

Thank you
Let's assume (for this discussion) that the IRS accepts that the UK 25% "Lump Sum" is a partial distribution.
Would this UK tax-free partial distribution still be taxed by the IRS under the UK/US Treaty rules as defined by Article 17, 1 (a) or (b) or would it be exempt from US taxes??

nun

The critical thing here is whether the UK 25% tax free lump sum is treated as pension income so that it can benefit from the reciprocal tax free status of Article 17.1. Generally, pension income is taken in a series of substantially equal payments over a lifetime, so a 25% distribution would not conform to that. However, the 25% is less that the entire amount withdrawal that is defined by the IRS as a "lump sum". It's ironic that ROTH IRAs are both US and UK tax free.

The conventional wisdom is that the UK 25% tax free amount is taxable in the US, but if you have a reasonable argument for it being tax free then go for it.

Glasgow Kid

Nun
I think that there's a reasonable argument to me made since the US definition of a lump sum does not represent the UK 25% partial distribution.
A US tax attorney has already told me NOT to pay the US Tax as it's exempt based on Article 17, 1 reciprocal rule.
But that takes me back to the "key question", namely: Does Article 17, 1 (a) and/or (b) meet the reciprocal rule????
Article 17, 1 (a) states "Pensions and other similar remuneration beneficially owned by a resident of a Contracting State (I am US resident) shall be taxable only in that State (US)", so I assume that I need to pay US taxes on my UK Pension. I would only be free of tax if I was a UK resident???

lansbury

If you think the tax attorney has a good argument file your taxes but claim the U.K. lump sum is exempt from US tax under the treaty. However there is in existence a letter from the IRS, that has been posted on BE several times, which says they consider the U.K. 25% lump sum taxable in the US.

nun

UK pensions paid to US residents are taxable in the US. If you invoke the tax treaty you can avoid paying UK tax on them.

If you had claimed the pension while still a UK resident (ie not a US citizen or tax resident) then only UK tax would be due and the lump sum would be tax free. If you were to then move to the US you'd only pay US tax on the ongoing pension payments.

Your tax attorney is taking a very bold stance. Both professionals and amateurs have pointed out that the UK 25% tax free amount does not meet the IRS definition of a lump sum, but we are still left not knowing what lump sum means in the treaty. The safest way to keep the 25% tax free sum is to either take it before becoming US resident or use it to buy a bigger pension and then even cautious professionals agree that Article 17.2b applies and you will have a 25% US tax free basis.

If you make a 17.2b claim make sure you describe the 25% payment only ever as an income distribution, however, its "lumpy" nature might get some push back from the IRS.

Glasgow Kid

The US Tax attorney response to me on this matter is given as follows:

Treaty law is not an easy endeavor, even for international tax attorneys that have no formal education in treaty law.� The Technical Explanations put it in plain English - https://www.treasury.gov/.../tax-pol...ts/teus-uk.pdf and go to PDF Page 63.� Here’s the excerpt:
�
However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the State in which the pension scheme is established if the recipient were a resident of that State. Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt from tax in the United Kingdom to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident. The same is true with respect to distributions from a traditional IRA to the extent that the distribution represents a return of non-deductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the distribution would be exempt from tax in the United Kingdom.
�
In the example above dealing with a UK resident, the UK honors the exemption for Roth distributions because it would be exempt from tax in the U.S. if the individual were a U.S. resident; thus, the UK reciprocates that exemption and honors it.�
�
In your case, if the 25% distribution would be exempt in the UK, the U.S. honors it as well.� They reciprocate the exemption; hence, the name “reciprocal pension exemption.”� And Art. 17(1)(b) is exempt from the Saving Clause.
�
I respect and fully appreciate the skepticism, but you’re dealing with complex international matters.� 95% of all of our referrals come from other tax attorneys who are wise to realize when something is beyond their expertise.

Any feedback on the above?

Glasgow Kid

The US Tax attorney response to me on this matter is given as follows:

Treaty law is not an easy endeavor, even for international tax attorneys that have no formal education in treaty law.� The Technical Explanations put it in plain English - https://www.treasury.gov/.../tax-pol...ts/teus-uk.pdf and go to PDF Page 63.� Here’s the excerpt:
�
However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the State in which the pension scheme is established if the recipient were a resident of that State. Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt from tax in the United Kingdom to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident. The same is true with respect to distributions from a traditional IRA to the extent that the distribution represents a return of non-deductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the distribution would be exempt from tax in the United Kingdom.
�
In the example above dealing with a UK resident, the UK honors the exemption for Roth distributions because it would be exempt from tax in the U.S. if the individual were a U.S. resident; thus, the UK reciprocates that exemption and honors it.�
�
In your case, if the 25% distribution would be exempt in the UK, the U.S. honors it as well.� They reciprocate the exemption; hence, the name “reciprocal pension exemption.”� And Art. 17(1)(b) is exempt from the Saving Clause.
�
I respect and fully appreciate the skepticism, but you’re dealing with complex international matters.� 95% of all of our referrals come from other tax attorneys who are wise to realize when something is beyond their expertise.

Any feedback on the above?

Cook_County

The technical explanation is the view of the US Treasury. It is not HMRCs interpretation.


I think in any case because of law changes in 2015 in the UK you might want to ask the attorney if he thinks that the position would have been different had you taken the payment as an UFPLS versus a PCLS.


I think you also need the attorney to provide you with draft wording for you to type on IRS Form 8833; so that his position is clearer. The brave part of the argument is treating this as "pension" versus a "lump-sum".