IRA tax treatment

Hi Can you please advise as I would like to make sure that I am declaring and treating my Inherited IRA income correctly, as reading the forum I am seeing different answers. I inherited a Vanguard IRA when my father passed away and I have been declaring the mandatory drawdown once a year and detailing it as Foreign Pension Income on my tax return and paying tax at 20%. This was advice from my accountant at that time. 1) can you please confirm whether it should be declared as a Foreign Pension, or is this incorrect and it should be declared elsewhere? (I note someone was declaring it as Foreign interest) 2) Is this mandatory drawdown definitely taxable? 3) If I draw the full sum and close the account, is this taxable? As again i have seen different answers ont he forum. Thank you, 

Name removed admin 

Just to add, I have reviewed HMRC's response to the forum post below which appears to be the same issue as mine and advises there is tax due on the annual drawdowns and should be declared as foreign interest, with the lump sum no tax due being that it forms part of the inheritance. https://community.hmrc.gov.uk/customerforums/pt/05fa1171-edc1-ed11-9ac4-00155d9771aa#5928749b-60c9-ed11-b595-0022484398b2 If you can please confirm this it would be much appreciated, Thank you

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.  
Have a look at :
Tax on savings interest
DT19852 implies that tax is not payable in the USA on this interest. 

Hi
IRA interest is definitely taxable in the UK and should be shown on a self assessment tax return every year, as foreign interest.  
It is the interest that is taxable, not the balance, should you close the account.

Hi Thank you for confirming, much appreciated and i will ensure it is declared as foreign interest going forward.

I have this issue also and want to make sure I am perfectly clear and in compliance. Am I right? The interest I earn on my IRA or any bank account in the USA needs to be declared on form SA106 as foreign interest? AND, the balance in the IRA account is not taxed when the iRA is closed?

Hi Bodhi

Yes that is correct.

Thank you

Similar situation I have 2 IRA'S from my late mother's estate. I pay UK tax in the uk as domiciled as a legal resident. Mother was USA citizen and never lived in UK. I am a USA citizen domiciled in the UK for 25+yrs. I file a self assessment in uk with tax advisor. Please explain is my inherited IRA'S treated as foreign inheritance, foreign pension (I never contributed to it), or will I pay foreign interest on the gain from the date of death of my late mother (June this year). please advise and which forms required for filing 2023 tax year. This will determine if I cash them both out or create inherited IRA and drawdown funds over 10 yrs.

Don't cash out the IRAs without talking to a US tax advisor. I'm a retired US citizen resident in UK with a US IRA and taking annual distributions but if I took the cash out of the IRA as a lump sum I would probably have to pay US income tax on the entire balance in the year that I took the cash. This could be an unpleasant surprise for you if the amount in your IRAs is substantial.

Hi Stephanie Thomas,

You will not declare the inheritance and any tax due is only on the interest that is received from the IRA, this is declared as foreign interest.

You may wish to contact a financial adviser regarding your options.

Thank you.

You say that a distribution from a US IRA is treated as UK interest for UK tax purposes, and that this interest would attract the starting rate of £5000.00. Does this mean that even if my other income exceeds the personal allowance (£12570 for the current year) and I have no other interest income, the first £5000 of the distribution would be free of UK tax? Second, I infer from the statement by Admin 5 in response to Bodhi that if I close my IRA and take all the cash out as a single lump sum, there's no UK tax to be paid. What would the UK tax consequence be if I took my required distribution (which I have been doing annually for the last several years) and then took a voluntary distribution of, say, one third of the remainder, would that also be treated as a lump sum with no UK tax payable?

Hi john2938

The £5000 starting rate only applies if your other income is under £17570.                                                                                                                                                                                                                                                                                        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 which, again from the perspective of a UK resident, states:  

‘Pensions and other similar remuneration beneficially owned by a resident of a Contracting State [UK]shall be taxable only in that State [UK].’ 

As a result, these periodic 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.   
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). This is in accordance with Article 24(1)(a) of the DTA, which states:  

‘In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income:  
the income tax paid or accrued to the United Kingdom by or on behalf of such citizen or resident.’
  
In summary, both periodic and lump sum payments from Traditional IRAs are taxable in the UK and need to be declared on the on the Foreign Income pages (SA106) of a self-assessment return.
The only difference is that periodic payments are taxable in the UK, so any US tax paid on those payments should be refunded by the IRS or, if you are a US Citizen, you should claim the US version of FTCR and offset the UK tax paid against the US tax charge. Whereas ’non-periodic’ or lump sum payments are taxable in both the UK and USA. In this situation, the UK should provide FTCR to offset the US tax correctly paid against the UK tax charged on that payment. 
 
Thank you

Two questions about this: 1.Is it true to say that If the IRA was an inheritance, then the base amount would not be taxed in the UK? I’m of course talking as an inheritor here. 2. When we are talking about UK tax on interest payments, Does this include interest that remains in the IRA? I’m going to be taxed on both the interest and the principal in the US when I take a withdrawal which may be several years later.

Expanding on my question above: I've seen it stated that Regular IRA is treated differently than Roth IRA's. This is only true when money is withdrawn from these accounts. While the money is in the account, the IRS treats them the same, all income whether it be cap gains, interest or dividend is allowed to accrue tax free in the account. The difference comes when you take a distribution from the accounts. With a Roth, the distribution is not taxed. In a Regular IRA, the entire withdrawal is taxed as if it were regular income. It doesn't matter that the withdrawal will consist of principal, interest, cap gains and dividend income. Considering the above, when you say that 'interest' on IRA's should be reported annually, are you actually talking about tax on withdrawals?

Hi James Walker,
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 I want to confirm that a withdrawal from an IRA is counted as interest. This thread and others are very clear about this, but when I told someone that has an IRA this they were told by their advisor to record the paymment as "income" under pensions. It makes a tax difference as foreign interest attracts interest tax relief (as far as I can see) but a pension payment would not. The advisor said that HMRC is wrong, but it would be wrong on this thread and a number of others too. Can this be clarified?

Hi Andrew Glasspool

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

My husband (USA/UK dual citizen) has an IRA and we now believe we should be declaring the interest/dividends received each year on his UK tax return. Please confirm if that is correct as these are not actually paid to us, but accrue in the account, none of which is really accessibile until after age 59.5 ?! Also, if this is the case should we go back and revise UK tax returns and if so for how many years? Or, would it be reasonable to calculate the % of the balance which represents the total dividends/interest accumuluted to date and declare this proportion as the interest element of any future withdrawals? The IRA, is valued at 100k and approx 40k represents the original investment in the contract. However, these investments are in stocks/funds and so, is the growth in the value of the underlying investment also tax free in the UK when one starts taking money out?

Hi,

Individual Retirement Accounts (IRAs) are treated as savings accounts by HMRC. Any withdrawals are treated as taxable interest and should be reported as such in the recipient's tax return(s).  If no withdrawals from your IRA have thus far been made, there is nothing to declare and you will not have to amend tax returns for previous years.

Thank you.

dual citizen retired and residing in the UK. I have a ROTH IRA, no stocks, just cash gaining annual interest. Do i have to declare this interest, which is still in the account, on my self assessment?