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Posted Thu, 18 Jan 2024 11:07:09 GMT by
I still don't understand how HMRC treats distributions (i.e, withdrawals) from an inherited IRA in the USA (an inherited one, not a traditional one). Are the distributions reported as foreign interest or foreign income? And are interest and dividends earned within the inherited IRA (through investments) reported at all? Thank you.
Posted Fri, 19 Jan 2024 10:55:56 GMT by HMRC Admin 21
Hi kOs
Payments made by the individual into an IRA, are made after tax relief is given to the individual by the employer.  Payments from this pension are taxable in the USA.  HMRC do not recognise IRA schemes as pensions, so for UK residents, they are taxed as income under the interest and declared as foreign interest on a tax return (SA106).    There is no US taxation if the pension is subject and liable to UK tax. If US tax is withheld, then the individual,  should seek a refund of this tax (file a form 1040NR).  HMRC will not give a credit for this tax against any UK tax charged on this income.   The interest is therefore based on the withdrawal you make.
Thank you.
Posted Fri, 19 Jan 2024 12:48:30 GMT by
Since posting, I came across this, which answers my question: https://community.hmrc.gov.uk/customerforums/sa/dff0fe21-b233-ee11-a81c-002248c79814 It clearly says that annual distributions on inherited IRAs aren't reported as income. One only reports foreign interest (and any dividends) earned by the IRA. I confirmed this in a phone call with HMRC.
Posted Tue, 06 Feb 2024 14:53:11 GMT by
I have followed through to the conclusive and formal looking guidance on Lump Sums from HMRC 19 from around 4 months ago. I copy it at the bottom for reference. The trouble is my reading contradicts theirs so I would appreciate some confirmation. Article 1(4) indeed says as stated: "Article 1(4) - Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State [UK and/or USA] may tax its residents, and by reason of citizenship may tax its citizens, as if this Convention had not come into effect." BUT.... Article 1(5) then says: "The provisions of paragraph 4 of this Article shall not affect: a) the benefits conferred by a Contracting State under[...] sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation)[...] b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes)[...]" Following that to Article 18 Paragraph 1: " 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,[...]" And Article 17 Paragraph 2 is the original US only tax treatment of lump sums : "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." So in summary: - lump sums taxed in US only - except these rules don't apply - except in certain cases - including when considering a lump sum It seems the last two pieces of this logic are not present in the HMRC response. Guidance from HMRC 19: Lump Sum Payments There is no legislative definition of a lump sum but HMRC regards these as being any non-periodic payment of a pension, that is, any non-regular payment that decreases the value of the remaining pension pot after such payment is made. For example, the first (IRA) withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7, such payments will not be regarded as periodic and will be treated as lump sums under the UK/USA Double Taxation Agreement (DTA). Whereas any amount withdrawn in set, periodic, frequent intervals, that is weekly, monthly, annually and so on would not be a lump sum, but rather periodic payments. Article 17(2) of the UK/USA DTA provides the US with the right to tax any lump sum payment which is made from a US sourced pension scheme, including IRAs. However, the UK is also permitted to tax the same lump sum payment(s), which is in accordance with Article 1(4) of the DTA, both Article 17(2) and Article 1(4) are outlined below and, when read from the perspective of a UK resident, state: Article 17(2) - Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State [USA] and beneficially owned by a resident of the other Contracting State [UK] shall be taxable only in the first-mentioned State [USA]. Article 1(4) - Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State [UK and/or USA] may tax its residents, and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. A UK resident, Article 1(4) above permits the UK to tax any US sourced lump sum payment received, as if Article 17(2) of the DTA was not in force or applicable, Article 1(4) effectively ‘overrides’ the provision at Article 17(2), and the consequence is that both the UK and USA can tax any lump sum payment received from a US sourced pension scheme. In these situations, double taxation will occur since both the UK and the USA can tax the same income. However, that double taxation will be eliminated in accordance with Article 24(4)(a) of the DTA which requires the UK, as the country of residence, to provide Foreign Tax Credit Relief (FTCR) to offset the US tax correctly paid against the UK tax charged on the same the IRA withdrawal.
Posted Thu, 08 Feb 2024 10:32:53 GMT by HMRC Admin 20
Hi Daniel Ward,
Article 17(2) of the UK/USA DTA provides the US with the right to tax any Lump Sum payment which is made from a US sourced pension scheme (including IRAs). However, the UK is also permitted to tax the same lump sum payment(s), which is in accordance with Article 1(4) of the DTA – Both Article 17(2) and Article 1(4) are outlined below and, when read from the perspective of a UK resident, state: 

Article 17(2) - Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State [USA]and beneficially owned by a resident of the other Contracting State [UK]shall be taxable only in the first-mentioned State [USA]. 

Article 1(4) - Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State [UK and/or USA]may tax its residents, and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. 

A UK resident, Article 1(4) above permits the UK to tax any US sourced Lump Sum payment received, as if Article 17(2) of the DTA was not in force or applicable – Article 1(4) effectively ‘overrides’ the provision at Article 17(2), and the consequence is that both the UK and USA can tax any Lump Sum payment received from a US sourced pension scheme. 

In these situations, double taxation will occur since both the UK and the USA can tax the same income. However, that double taxation will be eliminated in accordance with Article 24(4)(a) of the DTA which requires the UK (as the country of residence) to provide FTCR to offset the US tax correctly paid against the UK tax charged on the same the IRA withdrawal.  

Thank you.

 
Posted Fri, 09 Feb 2024 13:15:08 GMT by
HMRC Admin 20 According to your last post and HMRC Admin 19 has stated this previously, Article 1.4 of the dual taxation agreement says a Contacting State "may" tax its residents. The so called "Savings Clause". So that isn't a "will" tax its residents, it is a "may". Lets assume for the rest of this argument that MMRC "will' tax its residents although that is not a given from the text of the agreement. Article 1.4 states Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect. Note the except paragraph 5 part. In paragraph 5 a) we have 5. The provisions of paragraph 4 of this Article shall not affect: a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this Convention; Note Article 18 paragraph 1 is listed. Article 18 paragraph 1 pasted below then states 1. 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). So it mentions Article 17 (2) which says that the lump sum would only be taxable in the USA and not the UK. i.e. We are right back to where we started with a few twists. The lump sum would have to be a pension scheme. I think HMRC does not regard an IRA as a pension scheme but a 401k is regarded as a pension scheme as would a company pension from a USA company. There is also a part at the end which says (and not transferred to another pension scheme). Does that mean for example rolling a 401k into a Roth IRA? Anyway for the original lump sum question it seems to me that even if HMRC applies 1.4 we end up with. 1.) IRA "may" be taxed in the UK because it is not regarded as a pension. 2.) A USA company pension lump sum would only be taxed in the USA and not in the UK as long as it is not rolled into another pension. 3.) A USA 401K lump sum would only be taxed in the USA because it is regarded as a pension scheme.
Posted Mon, 12 Feb 2024 09:03:27 GMT by
@stmac you have followed exactly my reading of the treaty also. @HMRCAdmin20 please can you respond not to article 1.4 but the steps beyond that as highlighted by both stmac and myself?
Posted Wed, 14 Feb 2024 08:52:33 GMT by HMRC Admin 21
Hi stmac,
We cannot comment on scenarios or detailed questions of this nature, only provide general information / guidance in this forum.  For an answer to a detailed question of this nature, you would need to contact our self assesment helpline on 0300 200 3310, or seek professional advice.
Thank you.
Posted Thu, 15 Feb 2024 09:44:12 GMT by HMRC Admin 25
Hi Daniel Ward,
Guidance has been given as per previous reply.
If you need a  more detailed response you will need to contact us direct on 0300 200 3310.
Self Assessment: general enquiries
Thank you. 


 
Posted Wed, 06 Mar 2024 00:34:20 GMT by Michael Young
Hi, as a US 401k/IRA interest is taxable in the UK, are the sale of assets within it (held for over a year) taxed at Long Term Capital Gains rates? As a UK-US citizen can I sell and rebuy assets within say the 401k prior to moving to the UK and becoming a tax resident to reset the cost basis of them, then sell them at LTCG in the UK at the 10-20% rate then withdraw those sale funds taxed in the US and apply Foreign Tax Credits from the UK to the USA on withdrawals? As the cost basis was reset upon arriving in the UK the gains would likely be low at first, and if a loss could that loss be carried forward in the UK to be used against other LTCG's from brokerage accounts?
Posted Wed, 20 Mar 2024 12:56:15 GMT by HMRC Admin 20
Hi Michael Young,
Please refer to:-
Capital Gains Manual CG26510 - Arrival in and departure from UK: temporary non-residence: gains or losses excluded from TCGA92/S10A* - year of departure 2013-14 or later
for information on gains and losses where residence may be involved.  
And also Capital Gains Manual CG13350P - Capital Gains manual: introduction and computation: occasions of charge: bed and breakfasting: contents
for information about bed & breakfasting.  
I should that you may wish to call us to discuss his enquiry in more detail:- Capital Gains Tax
Thank you.

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