Frugal_Squirrel

Hello,

My husband (UKC, soon to be a dual UKC/USC after 19 years as a permanent resident) is in the process of transferring an old traditional defined contribution personal pension from Aegon/Scottish Equitable to an AJ Bell SIPP. Opening the SIPP as a US resident and initiating the transfer were no problem. We are waiting for the transfer to complete. The value will be transferred as cash since the old pension's funds are not available on the AJ Bell platform (and we would not want to keep them anyway -- high expense ratios).After retirement in 5 years' time, my husband plans to make occasional withdrawals using UFPLS.

Is there anything we should be careful of from a US tax standpoint when choosing investments within the AJ Bell SIPP? I was thinking that since the SIPP is a pension plan, only distributions (not capital gains, dividends, etc.) would be taxed by the IRS and we would not have to worry about PFICs -- is that correct? We are planning to invest in a simple Vanguard LifeStrategy fund in the SIPP.

Thank you as always!

Cook_County

The rollover will be reported on the pension line of Form 1040 for the year of the transfer. Both pension plans will be reported on Form 8938. Both pension plans will also be reported on an FBAR. The SIPP is arguably a foreign grantor trust, resulting in annual 3520 and substitute 3520-A filing. Some advisers recommend being cautious and avoiding selecting PFICs. Others think this is not a concern. You may want to research whether owning PFICs might nonetheless result in US tax becoming payable at death.

Frugal_Squirrel

Thank you Cook_County . The old personal pension has been reported on Form 8938 and disclosed on an FBAR every year. I appreciate the reminder to report the rollover on next year's return, and to include both accounts on the 8938 and FBAR.

After reading many blog posts and articles from expat tax advisers, as well as threads on this forum, it seems clear that the experts don't agree on whether SIPPs are deemed to be grantor trusts, and if they are, whether 3520 and substitute 3520-A, and/or form 8833 claiming a tax treaty exemption for income within the SIPP, are required to be filed. The IRS does not seem to have made its position very clear. I have also read that our state (California) does not respect the tax treaty, so income within the SIPP could be taxable at the state level.

But to return to the topic of PFICs within a SIPP -- I will look into whether I can just as easily avoid PFICs. I know there are US domiciled ETFs that are also UK HMRC reporting funds, such as certain Vanguard ETFs, but I don't see these specific ETFs listed in AJ Bell's online research tools so I may have to give them a call to see if investing in them is possible.

Thanks for any further input and opinions on this. We don't have a tax adviser, I prepare our returns, and we don't have the kind of assets that would justify hiring an expat focused CPA. Even if we did, given the divergence of published expert opinions, it seems like half of them are wrong. I only wish I knew which half!

Glasgow Girl

I also rolled over my private pensions to A J BELL. As you state there is a split decision on whether a SIPP is a foreign grantor trust or not. Many of us, including me, have taken the position that it is not. I did so because the IRS has never made a clear statement on this; the 3520 forms are very complex; no one has ever been prosecuted or fined in any way for taking that position and you can be sure that the IRS would would widely publicize such action. I declare the AJ BELL account on an FBAR and Form 8938 each year, but of course stopped declaring the old pension accounts the year after they were closed.

Another area where there is a split decision is whether PFICs are protected within a SIPP. One well documented position is that qualified UK pension plans are protected by the US-UK tax treaty, and as such all transactions occurring within such a plan are exempt from US tax and reporting requirements. When you withdraw assets from the SIPP, they then become subject to US tax and reporting requirements. From a PFIC perspective this means that you can hold mutual funds within a UK qualified SIPP, do not need to report on PFIC forms but should cash PFICs out within the PFIC before transferring cash only over to the US and then paying tax on that income at ordinary income levels.

AJ BELL does restrict the funds available to US residents so you are not able to access all funds that are available to UK residents. That is likely why you cannot see the ETFs you are looking for. With that said there are plenty of other funds to choose from.

Many people take the same approach as I do. A few take the 100% safe route and declare a SIPP as a trust, and hold only bonds, cash or individual shares in their SIPP. You have to decide if the increased paperwork and more restricted investment options make that a better choice for you or not.

Frugal_Squirrel

Glasgow Girl I always look forward to seeing your input on these threads, as it never fails to be well-considered and sensible. Thank you so much for sharing your experience and thoughts.

I am still exploring the question of whether a SIPP is in fact a grantor trust and what is a reasonable position to take regarding the reporting requirements in respect of the 3520 forms. I have found many expat-focused tax pros claiming that the 3520s must be filed, but I also recognize that these experts have a vested interest in promoting this view because it generates more business for them, and moreover can be expected to take the most cautious approach due to liability concerns.

As to the issue of PFICs within a SIPP, which was my main reason for posting, I have done more research and am reasonably satisfied that there is indeed an exemption to PFIC reporting for funds held in UK pensions. Specifically I found these regulations issued by the IRS in 2016:

I also found a number of expert opinions to support this position, such as this article for example:

So, I do not have to limit our investments to only US-domiciled funds or ETFs in the SIPP. I have tried to follow Cook County's advice to research whether owning PFICs might result in US tax becoming payable at death, but I haven't found any relevant information either in the course of my other PFIC research, or using more specific search strings. Cook_County do you have any informational links you could share, or a bit more detail as to why this is a concern?

Cook_County

Great question. The 1992 PFIC Regulations say that death creates a charge for PFICs. To be exact: Prop. Treas. Reg. Section 1.1291-3(b)(2), 57 Fed. Reg. 11029 (Apr. 1, 1992). You'd have to figure out which set of Regs take precedence.

Glasgow Girl

PFICs within a SIPP are not subject to US tax or reporting requirements, which would include protection from the above regulation. In any case if the beneficiary is a US person then I believe that upon death the PFICs would be cashed out within the SIPP and the cash proceeds transferred to the beneficiary. The beneficiary would have no PFICs to be concerned about. More on that later.

Glasgow Girl

That is excellent information on the issue of holding PFICs within a SIPP. Thank you.

Glasgow Girl

With regard to the death issue, I believe AJ Bell would normally transfer the fund as is into the beneficiary’s name, or cash it out and pay it to the beneficiary as a lump sum. Of course it gets more complicated depending upon whether your beneficiary is US based or UK based. Cutting through all the details, the following is my best guess at what would happen upon death. If your beneficiary is based in the UK then UK rules will apply and tax will be due to HMRC only. If your beneficiary is US based then because of the international complexities AJ Bell would cash out the funds within the SIPP and transfer the cash proceeds to the beneficiary. The US beneficiary beneficiary would have to pay tax to the IRS but at ordinary income rates not the punitive PFIC taxation rates. Some beneficiaries of US retirement accounts can defer any tax due if they qualify for an option to roll it over into their own retirement account, or take it over a period of years (different rules apply depending upon your whether you are a spouse, a dependent child and a few other circumstances). They might allow also that for an inherited UK retirement account.

I would call AJ BELL and ask them how they would handle the transfer to a US person. I am sure they have a process for these exact circumstances and have done it on more than a few occasions.

Glasgow Girl

Totally agree. The better ones take this approach but even they fail to identify that international tax issues are rarely black and white and that there are other approaches. The worst ones specialize in providing just enough information to scare people to death and make the situation seem so complex and scary that only they can manage it, and of course for a very large fee. In many cases a little more information would help people understand that they have other options and in many cases can manage the situation themselves without the need to pay exorbitant fees to the professionals. This forum (and others) provide a wealth of information to combat these scare mongers.