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yet another pension question! - unusual UK pension situation

yet another pension question! - unusual UK pension situation

Old Sep 10th 2020, 5:27 pm
  #1  
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Default yet another pension question! - unusual UK pension situation

I know there are a million questions about UK pensions for US residents/citizens here already. I have been reading through pages of forums on the subject and I think I have a pretty decent understanding of the basics of UK/US pensions issues.
My situation is a little unusual I believe.
I am due to inherit a pension from my father who died last year. The pension itself is not a standard pension. It is in fact a single commercial property that generates rental income. The property and cash from the income is wrapped in a pension in the UK. He wanted his 3 children to inherit a third of this pension. For my UK siblings this is not an issue. For myself I see this could be fraught with problems.

I would assume that this pension would not be recognised in the US and as such I would be taxed as a foreign property investment. Since it is wrapped in a pension in the UK I would not be able to access any of the income or capital in the property so might have to pay a considerable amount of tax in the US but with no extra income to pay for it.

I can't really transfer the pension to a US compliant SIPP since it is really just a property of which I only own 1/3

One option might be for me to to take the cash portion of the pension and transfer that to a sipp like myexpatsipp and my siblings are left with the value of the property which is currently of a similar value to the cash portion. I am not really concerned about getting the best performance from the pension, I am just trying to minimise taxes I might have to pay on it in the USA or penalties in the UK, so the pension remains and asset and not a liability to me.

I feel I need some expert advice on all of this but not sure where to look. I am prepared to pay for such advice and I know it doesn't come cheap. Do I need to talk to a tax lawyer or a CPA with expertise in UK/USA taxes. Apart from Pete at British Expats I haven't really seen any strong recommendations for other companies big or small.


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Old Sep 10th 2020, 6:36 pm
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Default Re: yet another pension question! - unusual UK pension situation

i have no first hand knowledge of this type of pension so take what comes next with a pinch of salt although I am reasonably confident of what I am saying.

In general unless you are receiving income you do not pay tax in the US, so until you start drawing from the pension you should not have any tax to pay. Ditto If you guys sold the property and kept the proceeds in the pension wrapper.

You do not have to declare Real Estate on an FBAR but I would declare the cash component on one and if you wanted to be ultra cautious include the value of the property. No one ever got into trouble by over declaring on an FBAR. I would include the total value of the cash and property when filling in Form(s) 8938 that go with your tax return and check the no income received boxes assuming you did not withdraw any income. Alternatively, you might want to fill in the Foreign Trust Form 3520 with your tax return instead of Form 8938 for the pension. . That one is a real PIA to fill in so maybe get some help with that one first time around if you have difficulty with it.

When you do start withdrawing income I would declare it as you would for a normal pension. Others can advise on that as I have not withdrawn anything from mine yet but I think you declare it as “other income” and pay tax at your highest marginal tax rate.

So my advice for what it is worth is to fill in the FBAR and Form 8938 or 3520 for now and I think you are good until you withdraw and then treat as a regular foreign pension withdrawal. As you say professional advice is not cheap and unless you are a straightforward case (in which are you really don’t need it). Most of them do not really know, research themselves and come up with their best guess while sticking you with a very large bill.

You could also try calling the IRS but I very much doubt they would give you a definitive answer as most of the agents have very little knowledge of foreign issues. Remember that the IRS is not out to get legitimate individuals who are not trying to cheat the system, although the so-called tax professionals would have you believe otherwise when touting for business.

Last edited by Glasgow Girl; Sep 10th 2020 at 6:49 pm. Reason: Clarification
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Old Sep 10th 2020, 6:50 pm
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Default Re: yet another pension question! - unusual UK pension situation

From my understanding, the issue is that the IRS would regard this as a non exempt pension. As such it would be subject to taxation. That being said maybe my confusion as to what exactly is going to be taxed. Since this pension will not be receiving any further contributions, if the taxation occurs on the contribution rather than the contents of the foreign pension then maybe non of this matters.
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Old Sep 10th 2020, 7:00 pm
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Default Re: yet another pension question! - unusual UK pension situation

It sounds like a legal mess and my first thought is not only that the US won't recognise the pension wrapper, but that you may have inadvertently become the beneficiary of a foreign trust.

I haven't heard of a property investment being wrapped in a pension, and I wonder what the end point is? You and your siblings have inherited one-third shares of a pension fund invested in a single property, so what happends next? Did you father envisage that the pension would persist until the last of the three of you died?

There are several reasons why you might want to terminate the pension arrangement, and assuming that it behaves like a trust then the three of you (assuming that the three of you are the only beneficiaries of the pension assets) should be able to terminate the trust, which would be convenient for you, though I am not sure how that might affect your siblings, or what tax implications there might be.

Last edited by Pulaski; Sep 10th 2020 at 7:02 pm.
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Old Sep 10th 2020, 8:14 pm
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Default Re: yet another pension question! - unusual UK pension situation

Certainly I believe that in the US I would be regarded as the beneficiary of a foreign trust. The problem is that since that "trust" is generating a fairly significant income (from the rent) I think I might be liable for tax on that income (even if I don't and cannot actually receive that income - as it's locked in a UK pension). I had a Canadian friend with a similar situation where he had to pay large amounts of tax on in an inheritance he couldn't actually access or benefit from (until he retired). The problem is that because in the UK, where my siblings live, it is a pension and as such cannot be liquidated without a huge 40% penalty we can't just terminate the trust. In the UK it's possible for all 3 of us to be made beneficiaries of the trust.. but I screw it all up being a US citizen and tax payer.
I do believe it has the potential to be a huge headache (which is a shame since my dad went to extreme lengths to make dealing with his estate as easy, equitable and cheap as possible.
Again I am not sure if I need a tax accountant CPA or a tax lawyer for such a matter.. or maybe both. I am not quite sure what the difference is frankly. I imagine the lawyer will create the argument to support a certain tax filing and argue it in court if necessary. The CPA just files the tax forms and knows what is and isn't allowed.
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Old Sep 10th 2020, 8:24 pm
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Default Re: yet another pension question! - unusual UK pension situation

Originally Posted by angelman View Post
Certainly I believe that in the US I would be regarded as the beneficiary of a foreign trust. The problem is that since that "trust" is generating a fairly significant income (from the rent) I think I might be liable for tax on that income (even if I don't and cannot actually receive that income - as it's locked in a UK pension). I had a Canadian friend with a similar situation where he had to pay large amounts of tax on in an inheritance he couldn't actually access or benefit from (until he retired). The problem is that because in the UK, where my siblings live, it is a pension and as such cannot be liquidated without a huge 40% penalty we can't just terminate the trust. In the UK it's possible for all 3 of us to be made beneficiaries of the trust.. but I screw it all up being a US citizen and tax payer.
I do believe it has the potential to be a huge headache (which is a shame since my dad went to extreme lengths to make dealing with his estate as easy, equitable and cheap as possible.
Again I am not sure if I need a tax accountant CPA or a tax lawyer for such a matter.. or maybe both. I am not quite sure what the difference is frankly. I imagine the lawyer will create the argument to support a certain tax filing and argue it in court if necessary. The CPA just files the tax forms and knows what is and isn't allowed.
I would say that a tax lawyer is what you need, and not just any tax lawyer, but one who has experience of messy international tax situations, and how to mitigate the conseqences. If I were to say any more it would be pure speculation, so I'll stop here.
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Old Sep 10th 2020, 8:41 pm
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Default Re: yet another pension question! - unusual UK pension situation

One option may be to transfer the pension to a trust in the UK. It may also be preferable to transfer the property to tenants in common. The survivorship situation may possibly be different. IE At the moment if you die your share of the pension may be split between the other 2 siblings and not transferred to you heirs. Either way , it is worth getting some UK and US advice. Personally I would start in the UK because that may ultimately determine what you do from a US perspective
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Old Sep 10th 2020, 9:13 pm
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Default Re: yet another pension question! - unusual UK pension situation

Just a thought from someone who knows very little about trusts and pensions but pensions are only considered income when you start to take withdrawals from the pension. Since either of the three of you can touch this benefit until you are eligible to do so at retirement age, why is there a problem to worry about at the present?

BTW congratulations on your US citizenship.

P.S. Sorry your dad did this to you and your siblings. I wonder if either or all of you have had issues with finances in the past and he was looking out for your retirement financial well-being.
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Old Sep 10th 2020, 9:18 pm
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Default Re: yet another pension question! - unusual UK pension situation

Originally Posted by Rete View Post
Just a thought from someone who knows very little about trusts and pensions but pensions are only considered income when you start to take withdrawals from the pension. Since either of the three of you can touch this benefit until you are eligible to do so at retirement age, why is there a problem to worry about at the present? ....
Because the US might not recognise (per post #1 above) this peculiar arrangement as a pension, which would instead make it, from the US IRS's perspective, a foreign trust.

However if the pension wrapper is compliant with US tax and pension legislation then you are probably correct.
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Old Sep 10th 2020, 11:17 pm
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Default Re: yet another pension question! - unusual UK pension situation

To be clear my father actually arranged everything extremely carefully and the whole thing has gone incredibly smoothly. Rather weirdly he had his accountant update his master list of every asset, bank account he possessed neatly tabulated and laid out just a week before he suddenly died from heart failure. We don't have to worry about this issue immediately but my mother is trying to tie up all the loose ends so she can put her mind to rest. I have advised her though that there is no rush on any of this and we can afford to take our time.
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Old Sep 11th 2020, 1:51 am
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Default Re: yet another pension question! - unusual UK pension situation

I personally would contact someone like these people, I would assume the advice would quite possibly be free or certainly under $200. It would give me some peace of mine. I am not sure how the US deals with inherited pensions

https://www.kpateloffice.com/us-tax-uk-pension-plans/
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Old Sep 11th 2020, 3:49 pm
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Default Re: yet another pension question! - unusual UK pension situation

Definitely above my pay grade, I would be contacting a dual US/UK qualified tax preparer as suggested above. In reading mrken's article link I see that the OAP is only taxable in the UK which is interesting since both myself and my wife will start receiving OAP next year and that means my wife's OAP will be tax free in both countries since it will be her only source of regular income, at least for a year or so when she then will start drawing her US SS.
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Old Sep 11th 2020, 4:31 pm
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Default Re: yet another pension question! - unusual UK pension situation

It would be useful to know what sort of a pension it is wrapped in. If it turns out to be a foreign trust in the eyes of the IRS, i thought this was a pain largely because of the reporting? If all that is in it is a property and cash, the reporting might not be too bad at all
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Old Sep 11th 2020, 4:50 pm
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Default Re: yet another pension question! - unusual UK pension situation

Originally Posted by newadventure View Post
It would be useful to know what sort of a pension it is wrapped in. If it turns out to be a foreign trust in the eyes of the IRS, i thought this was a pain largely because of the reporting? If all that is in it is a property and cash, the reporting might not be too bad at all
If the US doesn't recognise the trust then the income and gains attributable to the US-taxable person are taxable annually, so you would be required to pay tax each year even if the trust makes no disbursements of income or the beneficiary has no access to the gains.
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Old Sep 11th 2020, 5:05 pm
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Default Re: yet another pension question! - unusual UK pension situation

Originally Posted by Pulaski View Post
If the US doesn't recognise the trust then the income and gains attributable to the US-taxable person are taxable annually, so you would be required to pay tax each year even if the trust makes no disbursements of income or the beneficiary has no access to the gains.
Aha. Makes sense
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