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UK Pensions related to UK/US Tax Treaty

UK Pensions related to UK/US Tax Treaty

Old Mar 13th 2018, 12:54 am
  #76  
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Default Re: UK Pensions related to UK/US Tax Treaty

I’m not sure if it would be different as you are a U.K. resident. This topic is mainly for US residents who were previously U.K. residents. Fun isn’t it!
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Old Mar 13th 2018, 11:46 am
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
You declare all your income for US taxes. This discussion is about whether the pension 25%,so called lump sum in the UK, is taxed or not?
Originally Posted by Desertsun2018 View Post
I’m not sure if it would be different as you are a U.K. resident. This topic is mainly for US residents who were previously U.K. residents. Fun isn’t it!
This topic is very relevant for a USC resident in the UK with a UK pension. A USC is always resident in the US for tax purposes, each and every year, regardless of where and for how long they have actually been physically resident elsewhere.

Prior to 2015, a USC living in the UK and activating a UK pension automatically assumed (per IRS guidance in the letter mentioned above by lansbury) the lump sum was taxable by the US. A major change resulted from the initiation of UFPLS rules by HMRC which offered an alternative interpretation/opinion for those subject to US taxation. Sadly, as before, there remains no factual guidance on the situation.

It's a shame more UKCs or dual UKC/USCs resident in the US aren't aware of the commonalities they share with UK resident USCs, and the resulting common problems. If it's confusing for the UKC resident in the US, it's multiple times more confusing for the USC resident in the UK.
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Old Mar 13th 2018, 2:21 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by theOAP View Post
If it's confusing for the UKC resident in the US, it's multiple times more confusing for the USC resident in the UK.
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Old Mar 13th 2018, 5:25 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by theOAP View Post
If it's confusing for the UKC resident in the US, it's multiple times more confusing for the USC resident in the UK.
Indeed it is
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Old Mar 13th 2018, 6:10 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Confusing or not. The question remains.... is the 25% of our hard earned pension pot taxable in the USA? I don’t think we yet have a definitive answer?
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Old Mar 13th 2018, 6:58 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
Confusing or not. The question remains.... is the 25% of our hard earned pension pot taxable in the USA? I don’t think we yet have a definitive answer?
It's simple, really.

First, agree with your UK pension provider to initiate a series of periodic payments under UFPLS with a portion of each payment qualifying under HMRC rules, and that 25% of each periodic payment is tax free. Collect the first payment and file a US tax return claiming that under the treaty the 25% tax free amount is from a periodic payment, not a lump sum, and site the treaty as authority. When the IRS refuses your tax free claim, hire an ace international tax attorney to give you an opinion which hopefully supports your position. Armed with this opinion, file an appeal with a US Tax Court and hire the attorney to represent you. If the court agrees with the attorney and issues a ruling that 25% of the periodic payment is tax free, then job done. You have your definitive answer. If the court disagrees with your stance, then you still have a definitive answer.

If you're waiting for the IRS to issue a definitive answer, then it may be a long wait.

Last edited by theOAP; Mar 13th 2018 at 7:01 pm.
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Old Mar 13th 2018, 7:02 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
I don’t think we yet have a definitive answer?
We do, you just don't like the answers.

1) As theOAP posted above.

2) Take the full 25% in one lump and as you are a US citizen pay the US tax on it.
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Old Mar 13th 2018, 8:15 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

It’s a shame that some members of this board are not open to discussion but prefer to enforce their views on the rest of us without the back up of accurate knowledge. I do not intend to make a career out of comments on this board like some but had hoped for some positive reinforcement and questioning of the situation. Thankfully others may see that not everyone agrees to just pay up without at least asking the questions. DYOR.
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Old Mar 13th 2018, 8:21 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
It’s a shame that some members of this board are not open to discussion but prefer to enforce their views on the rest of us without the back up of accurate knowledge. I do not intend to make a career out of comments on this board like some but had hoped for some positive reinforcement and questioning of the situation. Thankfully others may see that not everyone agrees to just pay up without at least asking the questions. DYOR.
The question has been asked many times.. and the same answers and conclusions are given each time. If you don't like them the only way forward is to pay a tax specialist to advise you with a written opinion which you can then rely on.

You asked for opinions and received them. I don't see how that amounts to forcing their views on the rest of us.

Last edited by MidAtlantic; Mar 13th 2018 at 8:46 pm.
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Old Mar 13th 2018, 8:33 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
It’s a shame that some members of this board are not open to discussion but prefer to enforce their views on the rest of us without the back up of accurate knowledge. I do not intend to make a career out of comments on this board like some but had hoped for some positive reinforcement and questioning of the situation. Thankfully others may see that not everyone agrees to just pay up without at least asking the questions. DYOR.
It's a shame that you seem unable to allow others to hold a differing view to yourself, but I guess in your world only you are right. The way I read the HMRC document may or may not be correct the only way to find out is to do as theOAP suggested. Until someone pushes the envelope it is all supposition.

By the way I didn't pay up without question. The 25% lump sum on my UK occupational pension was successfully paid to me without any US income tax being due for payment. Depending on the type of pension there are provisions in the treaty which allow that.
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Old Mar 13th 2018, 9:24 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Desertsun2018 View Post
It’s a shame that some members of this board are not open to discussion but prefer to enforce their views on the rest of us without the back up of accurate knowledge. I do not intend to make a career out of comments on this board like some but had hoped for some positive reinforcement and questioning of the situation. Thankfully others may see that not everyone agrees to just pay up without at least asking the questions. DYOR.
You are correct in one aspect, we do in fact 'do our own research'.

In your first post, reply #60 on page 4, you stated "I have been told these amounts are NOT taxable in US." Who told you this? Was it the tea lady? Was it from TurboTax? Was it H&R Block at the corner shop near where you live? Did it come from a respected qualified dual US/UK tax advisor with an international practice?

As much as we would like to agree that under UFPLS 25% of all periodic UK pension payments are tax free, how many ways do we have to tell you there is no substantial authority or guidance that sanctions that stance. There is much speculation and many opinions, some which we would very much like to agree with, but there is no substantial authority.

As for research, start with a US Government Accountability Office report which was just issued on 05 March 2018:

"Stakeholders told GAO that U.S. individuals who participate in foreign workplace retirement plans face challenges reporting their retirement savings for tax purposes because of complex federal requirements governing the taxation of foreign retirement accounts and a lack of clear guidance on how to report these savings. For example, stakeholders told GAO it is not always clear to U.S individuals or their tax preparers how foreign workplace retirement plans should be reported to the Internal Revenue Service (IRS) and the process for determining this can be complex, time-consuming, and costly. In the absence of clear guidance on how to correctly report these savings, U.S. individuals who participate in these plans may continue to run the risk of filing incorrect returns."


https://www.gao.gov/products/GAO-18-19

In the report, and although dealing with the transfer of pensions, the following is made clear.

"Even in cases where a tax treaty is in place, the treaty may not provide special treatment for the transfer of retirement assets. This would be the case in at least two of the five case study locations we examined, where despite a tax treaty in place, we were unable to identify any provisions that address these types of transfers. In these cases, according to IRS, the U.S. individual must fall back on the IRC, which does not provide tax-deferral on such transfers. As a result, a U.S. individual who participates in a foreign workplace plan would lose any tax-deferrals on the transfer."

https://www.gao.gov/assets/690/689773.pdf

As for tax advice, whether the opinions of posters on this site, or the advice of professional tax preparers, the following (from the compliance community again citing a GAO report) makes for interesting reading. It states for those of us who prepare our own tax returns, 50% of those returns are inaccurate! Except, it goes on to say that "[a] recent study by the Government Accountability Office found that preparer-filed returns showed an error rate of 60 percent". So I ask again - who told you these amounts are NOT taxable in US?

https://www.taxconnections.com/taxbl.../#.Wqgqy5UiF9C
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Old Dec 6th 2018, 5:16 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Obviously Pension Lump sum tax free amounts are complicated and having taken advice I am still confused as it said I could take the 25% tax free when a resident alien. I am currently a UKC resident in the UK who is effectively retired and I visit my USC fiancee as often as I can to stay below the substantial presence test. I will hopefully be getting a Fiance visa some time in mid 2019 and will as a result of my planned trips become a resident alien Feb 2019.
I have a SIPP in the UK and as I am over 55 I can access this and could take 25% tax free as a lump sum before I become a resident alien. I currently do not need the funds so my plan is to leave the SIPP to grow ( hopefully) and then go into drawdown later and hopefully have 25% of my periodic payments tax free in terms of UK and US Tax. I am aware that the first dual year 2019 will be a bit complicated and I will need UK and USA Tax advice but so far the advice is contrary re pensions and lump sum payments.

My question is are UKC resident in the USA successfully taking periodic ( ie monthly or annual payments and getting 25% tax free. I favour this approach as it allows me to remain invested in my SIPP and crystallise an amount each year for drawn down. The alternative is to take the Tax free lump sum 2018 and just reinvest it - Thoughts - comments welcome
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Old Dec 6th 2018, 8:40 pm
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by Wirksworth View Post
My question is are UKC resident in the USA successfully taking periodic ( ie monthly or annual payments and getting 25% tax free. I favour this approach as it allows me to remain invested in my SIPP and crystallise an amount each year for drawn down. The alternative is to take the Tax free lump sum 2018 and just reinvest it - Thoughts - comments welcome
Having been part of many discussions on BE in relation to this subject I cannot recall anyone posting that they had done this. A few have posted that it is allowed but have not appeared willing to put their money where their mouth is, as the saying goes, and come back here and report their success or otherwise. The third paragraph of post #86 above from the OAP seems a very fair summary of where things stand.

My very personal opinion would be that I would liquidate the UK tax free amount while I could and reinvest it in the US once living here. Having investments offshore while living in the US is a whole other minefield. I guess it boils down to how big would the 25% be and what tax would you pay on it, and are you prepared to gamble that amount if you try and take periodic payments once paying tax to the US. Do you feel lucky?
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Old Dec 9th 2018, 1:17 am
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Default Re: UK Pensions related to UK/US Tax Treaty

Originally Posted by lansbury View Post
The 25% lump sum on my UK occupational pension was successfully paid to me without any US income tax being due for payment.
How did you manage that?
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Old Feb 19th 2019, 8:37 am
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Default Re: UK Pensions related to UK/US Tax Treaty

US residents are normally treated the same as citizens for tax purposes but, interestingly, it's not just the HRMC that make a distinction for US citizens when it comes to tax treaties, and the savings clause.
I can't post URLs, but search for "site:irs.gov the taxation of foreign pension and annuity distributions"

IRS quote: "Some treaties have special rules, e.g., the USA-Canada and the USA-UK treaties have special rules for taxpayers who have U.S. green cards. You must read the residency article from beginning to end to find any special rules. You must also read all the Protocols of the treaty to see if the residency rules have been amended by a later Protocol. If you are a U.S. citizen, you also may need to refer to the so-called “saving clause” (typically found in Article 1) for special rules that allow the United States to tax in some cases as if the treaty had not entered into force."

This makes it 'almost' clear that the savings clause does NOT apply to green card holders, which would make the PCLS tax-free for a non-citizen US resident.

And from (search for "site:irs.gov taxtopics tc412" ) the IRS do define a 'lump sum' very clearly. IRS Quote: "A lump-sum distribution 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 " So the UK PCLS is most definitely NOT a lump sum according to the IRS definition as it's not the 'entire balance'.

Unfortunately, in my experience, the IRS frequently don't understand their own rules even on much less complex issues, but I'm certainly going to argue the case strongly for it being tax free when my time comes.
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