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Posted Wed, 23 Aug 2023 14:18:41 GMT by
Hi Gork14, I am also in a similar position where potentially I need to take a lump sum from my 401K and transfer funds to my UK bank account. As you posted a couple of months ago, did you follow through with your request and how has it panned out. From a US tax perspective, what tax was withheld and did you use a US advisor to take advantage of best tax practices? Appreciate any guidance you can provide. Cheers!
Posted Thu, 24 Aug 2023 19:10:20 GMT by
Hi Andrew, 1) I believe you can use the US tax tables because the IRA is considered effectively connected income since the contributions were made from income while working in the US. However 30% tax will likely be withheld and you will need to claim the correct amount on your US tax return. 2) Your IRA brokerage firm will still likely withhold US taxes but you can then claim these back on your next US tax return. The issue is whether it is treated as a lump sum by HMRC - if you see the earlier reply from HMRC Admin 32 then 25% would not be considered a lump sum and hence taxed as income. Hopefully an HMRC Admin will confirm how this 25% lump sum from a US pension should be treated for UK tax.
Posted Wed, 30 Aug 2023 10:52:16 GMT by HMRC Admin 20
Hi Andrew Dexter,

1. You would need to check with the IRS as to what tax rate is applied and what information to show on your return for there.  
2. 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.  
Have a look at hTax on savings interest.  DT19852 implies that tax is not payable in the USA on this interest. 

Thank you.
Posted Sat, 02 Sep 2023 10:45:51 GMT by
HMRC Admin, please can you explain why you consider an IRA should be treated as foreign interest and not a pension? An IRA (Individual Retirement Account) is included in the US/UK DTA definition of a pension as defined in Article 3(1)(o) just like a 401k so what is the justification to treat it differently?
Posted Tue, 05 Sep 2023 13:36:09 GMT by HMRC Admin 17

Hi,
 
Our legislation has made that decision  .

Thank you.

 
Posted Tue, 05 Sep 2023 14:18:45 GMT by
HMRC Admin, what specific UK legislation is being used to override the US/UK DTA which defines an IRA as a pension scheme? Please provide a link to the new legislation as this is a major issue for people with US retirement accounts.
Posted Wed, 06 Sep 2023 08:17:22 GMT by
HMRC Admin, please can you also explain how are lump sum withdrawls such as the complete balance from an IRA treated by this legislation that you are referring to? I don't understand how a lump sum withdrawl from an IRA (Individual Retirement Account) can be classed as foreign interest so does this only apply to income received from an IRA which would anyway be taxable in the UK?
Posted Thu, 07 Sep 2023 11:08:23 GMT by HMRC Admin 19
Hi ,

An IRA (Individual Retirement Account) is treated as a pension plan. According to Article 17 of the US/UK double taxation agreement, the country of residence at the time of distribution has the sole right to tax the distribution.  

UK legislation would not change this. The double taxation agreement, signed by representatives of both countries, would need to be amended to change this position.

Thank you.
Posted Thu, 07 Sep 2023 11:56:59 GMT by
Thank you for the prompt reply confirming that the US/UK DTA applies for an IRA. I’m still confused about the foreign interest statement made earlier though so is the following a correct interpretation for a UK tax resident (and not a US citizen/resident): 1) a lump sum IRA or 401k distribution would be taxed by the US and not the UK as per Article 17 (2) 2) any other type of IRA or 401k distribution would be taxed by the UK and not the US as per Article 17 (1) 3) HMRC has determined that a non lump sum IRA distribution will be taxed as foreign interest in the UK. 4) How is a 401k non lump sum distribution treated - as foreign pension income or as foreign interest like an IRA? Thank you, Fred.
Posted Fri, 08 Sep 2023 16:40:51 GMT by richard37 Thompson
Myself (US citizen and resident) and my wife (US and UK dual citizen and permanent US resident) each have US traditional IRAs, with the spouse as primary beneficiary. When the second to die happens, both IRAs will go to the contingent beneficiaries: 25% each to my wife 2 sisters (UK citizens and permanent residents). When those contingent beneficiaries take a distribution from these IRAs they will have a 30% US tax withheld. Will they then owe UK tax also? Is the answer the same if their distributions are taken as one lump sum as opposed to smaller distributions over 5 years? We have the opportunity to convert all or part of our IRAs to Roth IRAs, which involves paying US income tax on the converted amount. The distributions from the Roth IRAs are then tax free in the US. In that case will the UK contingent beneficiaries experience UK tax on Roth IRA distributions?
Posted Tue, 12 Sep 2023 08:02:46 GMT by HMRC Admin 32
Hi fred,

A traditional IRA withdrawal or lumpsum, is treated as a pension and in taxable as income in the UK, as the payments into the IRA are deducted from your taxable income, in the year in which you make them, giving tax relief in that year.  Any interest earned is taxable as interest income.
Roth IRA withdrawals are not taxable, as the payments made to the Roth IRA are not tax deductable in the year in which you make them, so payments are made after tax is deducted.  
These would be classed as pensions and not interest.

Please see guidance here:

DT19853 - Double Taxation Relief Manual: Guidance by country: United States of America

Thank you.
Posted Tue, 12 Sep 2023 08:58:01 GMT by
Thank you HMRC Admin 32 for the reply however I believe that a lump sum distribution from an IRA or 401k would be taxed by the US and not the UK as per Article 17 (2) of the US/UK DTA ? Extract below from the DTA Article 17 dealing with pensions where the first-mentioned state would be the US in this example. "2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State."
Posted Wed, 13 Sep 2023 20:52:29 GMT by
I am also trying to fathom out what tax I will be paying. I have an inherited IRA account in the US (as a beneficiary from a US relative), I am a UK resident (NRA) I understood that I would not be liable for tax in the UK for the lump sum, but I would pay tax on the interest I receive on it. I know that I am liable for tax in the US. However, it's proving difficult to work out how much! According to the US bank, I will receive any distribution gross as I completed a W8BEN form, but am expected to know what tax I owe when they send me a 1099R in January, Now I am confused reading these posts, as it seems that lump sums taken from a pension are taxed in the UK - however it's not my pension, I am a beneficiary, but does that make a difference? Thanks
Posted Fri, 15 Sep 2023 12:27:25 GMT by HMRC Admin 19
Hi Fred,

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. You can see guidance here:

Tax on savings interest

DT19852 implies that tax is not payable in the USA on this interest. 

DT19852 - Double Taxation Relief Manual: Guidance by country: United States of America: Treaty summary

A 401k is an employer based pension scheme and is taxed as a pension in the UK. IRA's are not recognised as pension plans in the UK and are taxed as interest.

Thank you.
Posted Fri, 15 Sep 2023 13:42:03 GMT by
HMRC Admin 19 your reply directly contradicts HMRC Admin 19's reply in this thread from 8 days ago "An IRA (Individual Retirement Account) is treated as a pension plan" and HMRC Admin 32’s reply from 3 days ago that said “A traditional IRA withdrawal or lumpsum, is treated as a pension and in taxable as income in the UK”! I was simply questioning the lump sum part as that should be taxed by the US and not the UK under the terms of the DTA. IRAs (individual retirement accounts) are listed as eligible pension schemes in the US/UK DTA, extract from page 46 of the DTA: "it is understood that pension schemes shall include the following and any identical or substantially similar schemes which are established pursuant to legislation introduced after the date of signature of the Convention: (b) under the law of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans." Likewise as a pension scheme it should follow that a lump sum from an IRA is taxed according to the DTA: "2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State." The only uncertainty is the definition of a lump sum since it's not defined in the treaty and the IRS and HMRC have different definitions but for example the entire balance of an account is definitely a lump sum (IRS definition), a smaller amount is open to interpretation by HMRC. I don’t think there is any point asking these kinds of questions on this forum as the replies are contradictory so can’t be relied on!
Posted Sat, 16 Sep 2023 17:28:08 GMT by
This guidance that IRA interest is taxable in the UK is wrong to the best of my knowledge. IRA is covered by the tax treaty. The tax treaty makes it clear that gains are not taxable. This is the guidance which has been reaffirmed to me by US/UK international taxation firms. HRMC Admins, can you please point to why you feel an IRA interest is taxable?
Posted Sat, 16 Sep 2023 17:33:15 GMT by
"Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme)." This means Traditional IRA gains are not taxable. They are tax deferred.
Posted Sat, 16 Sep 2023 18:20:51 GMT by
Expanding more my previous posts. "A 401k is an employer based pension scheme and is taxed as a pension in the UK. IRA's are not recognised as pension plans in the UK and are taxed as interest." This guidance is incorrect. Please take note. A 401K is not regarded as a pension under UK domestic pension law. The same with IRA, both Traditional IRA and Roth IRA. You cannot QROPs any UK pension to a US 401k for example. The US/UK tax treaty is what sets up the special taxation treatment under treaty law. IRA (Traditional and Roth) and 401ks are considered pensions under the *treaty* definitions and subject to the taxation terms as defined in the treaty. Article 18.1 states that only distributions of recognise pension plans are taxable in the UK. And then, only if this would usually be a taxable event in the US side (i.e. carving out zero UK tax on Roth IRA distributions which are tax free if in the US). As per the previous correction by another HMRC Admin, no UK domestic law "overrides" this. The treaty enforces this. Any change would require an amendment in the treaties which cannot be done unilaterally. Every article I've read online supports this interpretation including the people who have handled my taxes ($$$) and specialise in this. While no doubt tax and treaty interactions are complicated, this guidance is wrong to best of my knowledge and will materially disadvantage people. Can we please ask for this to be corrected?
Posted Sat, 16 Sep 2023 20:11:53 GMT by richard37 Thompson
As my post from 8 days ago has not been individually addressed, I have questions for clarification of other answers. In the US, an IRA account and it's earnings are not taxed until some or all of the value is distributed to the owner or beneficiary, when the distributions are taxed. When a UK individual inherits an IRA as a beneficiary are the IRA contents taxed at the time of inheritance, or, as in the US, when the contents are distributed? Am I correct in interpreting that if an inherited IRA is distributed as a lump sum, it is not taxed as interest? On the other hand, the entirety of a partial distribution will be taxed as interest. In either case, please confirm that US tax paid on this US sourced distribution eliminates or reduces the UK tax because of the double taxation treaty. Are distributions from an inherited Roth IRA treated the same as from a Roth IRA into which the owner has made after-tax contributions?
Posted Sat, 16 Sep 2023 21:43:31 GMT by richard37 Thompson
Another question: is a Rollover IRA, (established by transferring assets from a company sponsored retirement scheme or in lieu of a monthly pension) treated differently than an Traditional IRA (established by tax deductible contributions from a wage earning individual)?

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