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%

You should consider whether the payment qualifies for relief as a lump sum from on overseas pension in which case no UK tax but US tax is due. This will e at graduated rates and not a flat 30%, this is likely the withholding and you would file a non resident US tax return to determine the final liability and if necessary claim a refund.

I am following this thread. I am a US citizen and born in the UK. I am considering returning to the UK as a resident (domiciled). I have lived in the USA for over 50-years. I am trying to figure out tax implications if I decide to return to the UK. I inherited an IRA from a U.S. citizen (non-spouse/non-parent) in 2015. I have been taking lifetime required minimum distributions (RMD) in the USA, which is where I've been living as a long-term resident. I am confused about the thread in relation to declaring "gross interest" if I was to be a domiciled resident in the UK. The American tax law taxes the whole gross amount as income (both the principal and interest of the proceeds) received in that particular year. How would I declare "gross interest" only to the HMRC? For example, would I work out how much interest was made from just the proceeds of the RMD from the point I inherited it, or would I be required to pay interest made each year on the full investment even on the amount that wasn't yet realized (sold)? Thank you for your consideration.

Hi dperry,

Your IRA provider will provide you with an annual statement of interest arising. Please declare the relevant gross amount in the Foreign Pages (SA106) of your self assessment tax return, and claim Foreign Tax Credit Relief re: any tax deducted in the USA.    

Self Assessment: Foreign (SA106)    

Thank you.

Hello, I've read through this thread which has answered most of my questions, but I'm still a bit confused! I am a UK citizen and resident with an inherited IRA. If I receive the money from the account ($100k +) as a lump sum, would I be liable to tax in the US? If so, can this be avoided by taking smaller distributions? I have filled out the W8-BEN form, but when I last spoke to the IRA provider they said that they reviewed their policies on withholding payments for overseas taxes and increased the withholding rate for the UK from 0% to 30% since 1st Jan 2024 - could this be correct? Thanks

I started this thread and am not a tax professional but can give you my experience. I received a traditional IRA (Roth IRA's are treated differently), which was paid out in one lump sum payment. The monies were paid to me without any withholding. After extensive enquiries I was told lump sum payment were taxable in the US, and as such I needed to submit a US tax return and pay taxes to the US government of a little over 30%. The lump sum payment also needed to be declared and my UK self assessment in foreign income. Remember that if you were to pay tax in the UK on the lump sum you may end up paying 40% plus on some or all of the money dependant on your personal tax situation I was informed that if IRA distributions were taken as smaller regular payments as a pension ( an option not available to me), then tax would be paid in the UK and nothing in the US although a Tax return would still be required. I have to say that I thought this would be a simple issue to deal with but have found I received conflicting information including from HMRC. I used a UK based US Tax specialist to deal with the IRS and an accountant to submit my UK self assessment. I am not convinced that either of them fully understood this matter and can only hope that taxes have been paid correctly. Good luck.

Dear Ismiatonreet, thank you for your reply - it's actually very helpful! And I agree about the conflicting info out there. Thanks again :)

Hi
As this relates to the US taxation rules you would need to contact the IRS in the USA for details.

Hi I have dual USA and UK citizen ship. I am now domiciled in the uk. I have a tradtional IRA in the USA. Is this classed as a asset, when it comes to the threshold amount of inheritance tax of £325,000. Allowance. As an example, I have a IRA worth £150,000. and my assets are worth £250,000. this brings my amount to £400,000, meaning my estate will now have to pay inheritance tax of 40% on £75,000.?? Or is my IRA tax inheritance free. Which would then mean my estate would not have to pay inheritance tax as it would be under the threshold.

Hi,

The UK does not recognise the IRA systems as a pension scheme, even when tax relief is obtained from US tax on payments made into it.

The UK treats an IRA account as a savings account and payments from it are charged to UK tax as interest. As a UK resident, the IRA capital would count as part of your estate for Inheritance Tax purposes. You can see information here:

How Inheritance Tax works: thresholds, rules and allowances

Thank you.

I have recently inherited a ROTH IRA, I understand these are different tax rules to the IRA - do I need to pay the 30% withholding tax in the USA