Inherited 401K

I have inherited the capital from a US 401k pension i.e. a US citizen died and left me as the beneficiary of their 401k pension pot. I am unclear how this is treated in UK tax. I have seen many forum posts with different explanations. I've seen some answers that say that, as it's inherited, the capital is non-taxable by UK but any interest or growth must be declared on a self-assessment return. Elsewhere I've seen it said that lump sums are taxable by the USA but are then non-taxable in UK. And lastly I've seen it said that the withdrawals are US tax free via the double taxation treaty but are then income in the UK. Any clarity on this would be much appreciated.

Hi,

A USA 401K plan is a company sponsored retirement account to which employees can contribute income, while employers may match contributions.  

In the UK, a 401K is treated as a pension and is taxed as such. As you are resident in the UK you will need to declare the pension for tax purposes in a Self Assessment tax return. You can see guidance here:

Tax on a private pension you inherit

Thank you.
 

Hi admin 19, Thanks for responding. So if I understand you correctly, the 401k is simply treated as if I've inherited an equivalent UK pension pot? The link you provided for inherited pensions has a table for different payment types. There's a few permutations listed so could I clarify a couple of points related to that. 1) As the owner died before 75 years of age, would I be right in assuming that regular disbursements of money from a 401k are equivalent to the line "annuity or money from a new drawdown fund" in the table? I.e. that a 401k is treated as a drawdown fund. 2) The table also references lump sums. I'm unclear whether a large partial distribution would be treated as a lump sum for tax? E.g. by taking 25% or 50% of the capital amount. If you could clarify the position on this that would be most helpful. Thanks.

Hi admins, Would you be able to clarify your answer above a little further for me? You say that the 401k is treated as a pension and taxed as such and you link to the guidance webpage. I wanted to check whether I've understood correctly, that you're saying this on the basis of a 401k being equivalent to the "drawdown fund" as listed in the table in the guidance?

Hi,

Roth IRAs, these are usually exempt from tax in the USA, under US domestic laws. However, it is the taxpayer’s responsibility to check with officials within the USA to confirm and establish that their Roth IRA is or isn’t exempt from tax in the USA . If the Roth IRA is in fact exempt from US tax, then it will also be exempt from tax within the UK.

This is in accordance with Article 17(1)(b) of the UK/USA Double Taxation Agreement (DTA) 

USA: tax treaties

Thank you.

Hi Jim3,
You are correct.
Thank you.