Inherited IRA Distribution

A 78 year old relative recently passed away in the USA. They were a US Citizen and Resident. I found out I was the sole beneficiary of their traditional IRA. (I am a UK Citizen and Resident) The IRA was converted to a beneficiary IRA before being paid out as a lump sum. (There were no other options). There was no withholding for US tax purposes. Do I need to declare this as foreign income or is this part of my inheritance. (I was left assets from their will). If I need to declare it, could anyone tell me what are the potential tax implications.

I have the same situation! Speaking to a Tax AccountSnt to find out more. When you filled out the IRA forms - did you place 0% as the tax treaty?

I believe I did. I have spoken to a US Tax accountant who believes I need to pay US taxes on the amount. The local agents for the IRA were stumped as they had never had to deal with a foreign beneficiary before, but the head office advised that obtaining an ITIN was not required for distributions on a foreign account. They have recently issued Form 1042-s (Foreign Persons US Source of Income Subject to Withholding). with an exemption listed as 3 "Exempt under Tax Treaty" 15 "Payee not subject to Chapter 4 Withholding". I have searched all over but cannot find anything that covers this situation.

Hi,

UK/US citizens resident in the UK are taxable on their IRA interest in the UK.  

IRA's are treated differently from Roth IRA's, in that they are taxable in the UK under foreign interest.  

The gross interest would be declared in the self assessment tax return, using the supplementary page SA106.  

The interest would be treated in the same way as UK interest and attract that starting rate of £5000.00.

The actual lump sum would be an inheritance and not taxable.

Thank you.

Thank you for the information, that helps greatly. Could I clarify that the Initial assets added to the transitional IRA account would be classed as the lump sum. There were no payments made from the account until the assets were sold. During this time there were some small increases in value but overall the value had reduced by 2% so the value I received was less than the initial lump sum so I assume there would be no tax to be paid. (The money is currently in an interest bearing bank account and I understand that any interest is subject to UK Tax.

I am in a similar situation. I was one of three UK beneficiaries of my US-resident (but UK citizen) aunt's IRA; my brother and cousin chose to take their shares as a single lump sum, but I have opted for equal payments over five years. As I understand it, the amount not yet paid to me does not accrue any interest, so the amounts paid out each year will always be the same (although I'm obviously at the mercy of the $/£ exchange rate). So from your reply above, am I right in thinking I don't need to declare the payments, as there is no interest involved? Thank you.

Hi s66sop Hall,

If there is no interest, you are correct in that nothing needs to be declared.

Thank you.

Hi Ismiatonreet,

Yes, that is correct.

Thank you.

To clarify some of this, an IRA is an individual retirement account and distributions from it, to a UK resident, are not interest but are considered to be foreign pensions. These pensions are still reported on SA106 but do not qualify for £5,000 starting rate that applies to actual interest.

Thanks for the reply Paul Dev. Unfortunately I am now confused so hopefully you can help clarify if I put some fictitious numbers to the query. At the time of my relatives death her IRA was valued at $250,000 which transferred to my name. The IRA company does not allow non resident alien to hold IRA to required the account to be paid to me. After two months I received an initial cheque for $242,400, Fifteen days later I received a second cheque for $2599.50 and two months later a final cheque for $0.50 for a Total of $245,000 Are these payments classed as distributions and therefore subject to UK tax, and if that is the case, I assume I will be taxed at standard tax rates (i.e. 20%, 40% 45%) . If that is the case I would have been better paying US tax of 30%