US pension and UK Tax

Hi R Erskine,
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 Sum’s under the UK/USA DTA.
Whereas any amount withdrawn in set, periodic, frequent intervals (.g. weekly, monthly, annually etc.) would not be a Lump Sum, but rather periodic payments.                                                  Periodic, frequent, payments or withdrawals (e.g. weekly, monthly, annually etc.), then those payments would have been taxable within the UK and ‘maybe’ exempt from US tax. This is in accordance with Article 17(1)(a) of the DTA
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 
Thank you.

A separate issue I have is receiving both US Social Security and UK state pension. I am US citizen and UK Permanent resident. Article 17(1)(b) Tax agreement between US and UK states "Distributions in one country are exempt from taxation in another. The country of residence at time of distribution has sole right to tax the distribution." I therefore include my SS pension on my UK tax return. It gets slightly complicated on US tax return and I will get back to the forum on whether and how I include my US and UK pensions on my f1040 tax return. Passive and Earned Foreign income is reported on f1116 and tax credits are determined whilst allocating standard deduction between incomes. However, the instructions for f1116 do not require the form for any income that is re-sourced due to taxation treaties. Furthermore f8833 also is waived on the instructions for where "a treaty reduces or modified the taxation of income derived by an individual from dependent personal services, PENSIONS, annuities, social security, and other public pensions, as well as income derived by artists..." SO...I am waiting to speak with US IRS about my UK and US pensions and hopefully both can be exempt on the front page of f1040 and no need for tax credits etc. it is interesting how different the tax rates are between the two countries (US lower) but standard deduction is much higher in UK. I'm trying not to be forced into f1116 as the tax credit limited to US tax rates which for me are lower. I think the whole US/UK tax scenario is a nightmare because ultimately Article 1(4) reserves the right to tax it's citizens as if the convention had not come into effect and for long-term residents in UK if you are deemed to have left the US, you can lose US citizenship for tax purposes and all assets revalued and taxed. Also I will need to fill out Alternative Minimum Tax form in US. My hair is thinning.

Hi Rob,
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. 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.                            Periodic, frequent, payments or withdrawals (e.g. weekly, monthly, annually etc.), then those payments would have been taxable within the UK and ‘maybe’ exempt from US tax. This is in accordance with Article 17(1)(a) of the DTA     If you are not a US citizen, then periodic pension payments will be fully exempt from US tax and you should claim a full repayment from the US IRS. However, if you are a US Citizen, you will only be permitted to claim the US version of FTCR, which will offset the UK tax paid against a US tax charge. This is because the US taxes its citizens worldwide income, regardless of where they are resident. So, if you are a US citizen, then Article 1(4) (as outline above) would kick in again and, this time, allow the US to tax any periodic payment received, despite Article 17(1) providing the UK with the sole right to tax. Again, Article 1(4) effectively ‘overrides’ Article 17(1), and the consequence is that both the UK and USA can tax any periodic payments received. 
In these situations, double taxation will occur since both the UK and the USA can tax the same income. However, this time, it is for the US to eliminate that double taxation, since they are the ones invoking Article 1(4).
Thank you.

Hi Sidney,
This would be under the foreign income section. If filing by paper it is the SA106 that you need.
Thank you.

Hello, I am a US resident and have a private pension in the UK. I can take out funds this year. As a US resident, I am generally required to report worldwide income, including pension income, on my US tax return. Under the US-UK tax treaty, UK pensions are typically only taxable in the UK but if I am a US resident, the UK may not tax my pension. Can you confirm that this is correct? Regards,

Hi,
Article 17 of the UK / USA tax treaty covers pensions:  
Uk/USA Double Taxation Agreement - 2002
You can claim tax relief in the UK by downloading and printing off the form here:
Double Taxation: UK-USA (SI 2002 number 2848) (form US-Individual 2002)
You need to declare all of your UK pensions including the State Pension if you receive it. After you have signed and dated the compled form, you send it to the IRS along with completed US form 8802. Please read the guidance notes for the address you need to send the completed forms to. The IRS will validate form and send it directly to HMRC.
Thank you.

I want to post on this site but it looks like I am replying to another post. My question is how is a regular US IRA distribution taxed in the UK?

Hi I’ve inherited a US retirement fund from which US tax at 30% was deducted when it was all withdrawn and paid into UK account Do I treat the gross as a lump sum payment in UK so 25% tax free the rest taxable but tax relief for US tax OR is it free of UK tax as the pension was inherited?? Thanks Sally

Hi Anne Drysdale,
Regular payments are fully taxable in the UK and should be declared to HMRC on the foreign income pages, SA106, of a Self Assessment return. If US tax has also been paid on those payments, then it is important to note that no UK tax relief can be claimed to offset that US tax charge against any UK tax due. Instead, you must approach the US Internal Revenue Service (IRS) to claim US tax relief and the type of US tax relief available will differ depending on whether or not you are a US Citizen. o
If you are not a US citizen, then periodic pension payments will be fully exempt from US tax and you should claim a full repayment from the US IRS.
However, if you are a US Citizen, you will only be permitted to claim the US version of Foreign Tax Credit Relief, which will offset the UK tax paid against a US tax charge. This is because the US taxes its citizen's worldwide income, regardless of where they are resident.
So, if you are a US citizen, then Article 1(4), as outline above, would kick in again and, this time, allow the US to tax any periodic payment received, despite Article 17(1) providing the UK with the sole right to tax. Again, Article 1(4) effectively ‘overrides’ Article 17(1), and the consequence is that both the UK and USA can tax any periodic payments received. 
Thank you.

Hi, UK citizen and resident with US 401(K) from past employment. 1) Can you confirm that a lump sum payment benefits from 25% tax free. Presumably, though, this counts towards the £268,275 maximum, or is that maximum possibly "enhanced"? 2) (Not sure you can answer this) Is it correct that the US payer will withhold taxes anyway on behalf of the IRS (as they are entitled to do by the treaty), and therefore the W-8BEN form is not useful in the pension context? Thanks, Jon

As follow up, will the withdrawal of funds from the 401(k), and the claiming of 25% tax free allowance, trigger the MPAA? Thanks, Jon

Hi Jabenson,
The whole payment is taxable as foreign income and you can claim Foreign Tax Credit Relief for the tax paid abroad.
Thank you.

Hi,

1. No the full lump sum is normally taxable.   
2. 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.   

Thank you.

Hi Admin 32, Thanks for the reply, but doesn't this conflict with the Admin replies to GeoffD69 and to James (regarding the recognition of 401(k) as pensions and Gosling (regarding the 25% tax free)? Leaves me confused. Thanks.

Hi,
HMRC reconise 401K as a pension, which is subject to the UK / USA tax treaty regarding pensions and lumps sums.  Have a look at Double Taxation Relief Manual: Guidance by country: United States of America: Notes
Please also have a look a the guidance at
PTM063210 - Member benefits: lump sums: Pension commencement lump sum (PCLS): payments
Thank you

I'm new to the forum, so apologies if this isn't the optimum thread for my US 401(k) question, but it's the closest I could find. I'm a UK citizen and resident in my 60s, planning for my retirement here soon. I have a legacy 401(k) account from time spent working in the USA. I would like to use some of this pot to help fund a capital project as soon as I retire. I don't need all of the fund balance for that, so I'd ideally like to let the residual balance continue to grow tax-deferred for another few years before withdrawing the remainder (before I reach the age when I have to make required minimum distrubutions, as I'd rather make a clean break with the US system before that milestone). I've been getting clued up about the US/UK tax treaty (thanks in part to this forum) , which I may want to make use of. My query revolves around whether payments from my 401(k) would be considered either periodic or lump sums (i.e. non-periodic). I'm purely focusing on the UK perspective here, not the US angle. Based on the HMRC response to a prior post (by R Erskine) above, I would assume that my 2 withdrawals (say 3-5 tax years apart), would be considered non-periodic. Can HMRC please confirm how it would treat such payments ? Also, in my UK tax return after the initial 401(k) distribution, how would HMRC determine whether that single payment was going to be part of a periodic pattern, or just an ad-hoc lump sum? Would I just invoke the treaty and state in the return that this was a lump sum ? Thank you.

Hi, A lump-sum payment derived by a resident of the UK from a pension scheme established in the USA, shall be taxable only in the USA.  Please have a look at the guidance at:
DT19850PP - Double Taxation Relief Manual: Guidance by country: United States of America: Contents
which includes the double taxation treaty.  A 401(k) plan is a company-sponsored retirement account to which employees can contribute income, while employers may match contributions.  There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.  With a traditional 401(k), employee contributions are pre-tax, meaning they reduce taxable income, but withdrawals are taxed.  Employee contributions to Roth 401(k)s are made with after-tax income: There's no tax deduction in the contribution year, but withdrawals are tax-free.  Employer contributions can be made to both traditional and Roth 401(k) plans.
Thank you.