IRA tax treatment

Can I ask regarding my situation please - I am a UK citizen and had to open an inherited IRA-BDA account when my Aunt passed away, I withdrew a small lump sum in 2023 of 15,000 dollars (30% withholding tax was deducted from the lump sum). My question is do I now need to register for self-assessment and fill out Form SA106 to declare foreign interest? My only other income was from part-time employment for tax year 2023/2024 of £3,000. If this is the case, is it correct that the lump sum is classed as inheritance and that I would only need to declare the interest which would have accrued on the account when I withdrew the lump sum in September 2023. The gross interest would be approximately £610.

Hi,
Its not clear if the initial fund was in an IRA for this question to be confirmed. you may want to call 0300 200 3310 for specifc guidance.
Thank you.

Hi - I think there is some confusion certainly for me on the definition of interest and balance on an IRA in the UK. 1. UK "Interest" seems to be US "distributions" from the IRA and ARE fully taxed as they happen? 2. UK "Balance" is the same as US "Balance" within the account so all the ongoing buying, selling, dividends etc within the account that change the account value or Balance are NOT taxed. Then lump sum vs regular distributions in the UK: distributions are counted as regular if they meet xyz criteria which seems to be monthly, annually etc and fully taxed. 3. So exceptional cased like liquidating all IRA's at once would be a lump sum distribution NOT taxed in the UK (but would be in the US)? Are these statements correct (plus any clarity on Lump Sum eg. Liquidating multiple IRA's on an irregular basis)?

Hi,

From the UK's perspective, an IRA in not a pension and so, it is not taxed as a pension, irrespective of its status in the USA.  

It is treated as a savings account and taxed in the UK, under the rules for interest. It is not covered by the tax treaty on pensions, but that of interest. Regular payments and lump sums are taxable as interest. If you still have concerns, you should perhaps consider seeking the advice of a professional, such as an accountant.

Thank you.

So, if I have a stock in an IRA that I sell (still inside the IRA so no US tax), do I pay capital gains tax in the UK on that sale (still inside the IRA) as I would in a regular brokerage account - or only get taxed on when I withdraw cash from the IRA as "interest"? This is important as I could sell and immediately rebuy all my holdings in the USA to reset the cost basis to current prices, THEN move to the UK and have zero tax to pay in the UK if I then turn round sell all the (reset cost basis) assets and take the cash out. Is the "interest" tax only on cash withdrawals or is there tax on buying and selling assets (and dividends) that remain in the IRA?

Hi,

The internal running of the IRA is not taxable. It is only when lumpsums are taken out of the IRA or frequent sums at regular intervals are withdrawn, that there is a UK tax liability, if you are resident in the UK.

Thank You.

HMRC Admin 8 - Yes I can confirm the initial fund was in an IRA.

Dear HMRC, I have some questions related to the above regarding IRAs. There are several kinds of IRAs: Traditional IRA, Roth IRA, Simplified Employer Pension (SEP) IRA, SIMPLE IRA, as well as inherited versions of Traditional and Roth which have been mentioned. Where HMRC Admin 19 says "From the UK's perspective, an IRA in not a pension" I think "IRA" refers to "Traditional (Inherited)" IRA, as other questions/answers mention that Roth IRAs are different. I understand the answers given above to mean that Traditional IRAs do not "generally correspond" to a UK workplace pension scheme, but contributions may be tax-deferred (if the account was opened before beginning work in the UK), growth within the account is not taxed, but withdrawals are taxed as savings interest. Is that correct? Roth IRAs differ in that contributions are post-tax and withdrawals are tax-free in the US. Are Roth IRAs considered to "generally correspond" to a UK pension scheme in any sense? I understood the treaty position on these to be that they do not correspond, but contributions are post-tax and growth and withdrawals are untaxed in both US and UK regimes. (thus making them, in UK terms, more like an ISA though with restrictions on withdrawals). Is that correct? Finally, SEP IRAs and SIMPLE IRAs are Traditional IRAs that employers (including self-employed individuals who might be working outside the US) can also contribute pre-tax income to (which is a deductible business expense for the employer). They are similar in some respects to SIPPs, employees can contribute up to the fairly low annual Traditional IRA limit but employers can contribute up to higher limits (something like the lesser of 25% of employee pay or $67k for SEP IRAs) making them potentially more attractive for the self-employed given that there are tax reporting complications for US tax residents having SIPPs. Are SEP IRAs or SIMPLE IRAs considered to "generally correspond" to any UK pension scheme (e.g. SIPPs or SSAS)? And if so would employee or employer contributions to them be tax-deferred / deductible as business expenses for UK tax purposes? Does this depend on whether the employer is UK tax resident (e.g. a self-employed individual paying employer contributions)? I asume that the answers regarding non-taxation of growth and taxation of withdrawals are the same as for Traditional IRA. I have looked and not seen anything specific about SEP IRAs or SIMPLE IRAs on this forum. They are specifically listed (as "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" in the "exchange of notes" as of July 2001 appended to the treaty. Specifically SEP IRAs are section 408(k) and SIMPLE IRAs are section 408(p). Thanks in advance

Hi RedSquirrel,
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.

Hi Latitude,
We can 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, contact our webchat facility at Contact-HMRC or seek professional advice.
Thank you.

I am a US citizen resident in the UK since 2005. My savings portfolio in the US includes an IRA and a Roth IRA. As both earn interest and dividends, I have been reporting these on my self assessment UK tax return as foreign interest and dividends and paying the associated tax. However, now that I'm reading this forum I'm wondering if I need to be doing this and if not can I file amended UK tax returns and claim back any overpayments?

Hi,
It is withdrawals from the IRA and Roth IRA that need to be considered.
You will therefore need to write in to amend the returns.
We can only go back to 2020 to amend.
You will need to make reference to overpayment relief - SACM12150 - Overpayment relief: Form of claims
Thank you.

OK many thanks ... is it possible to amend the returns online and view a new calculation and if not how do I calculate how much I am due back based on what my tax would have been had I not incorrectly included the foreign section with interest and dividends from my IRA and Roth IRA on those returns? I have copies of my returns from each tax year, but the calculations don't show the specific amounts of tax arising from the foreign interest and dividends just a total of tax due or overpaid.

Hi ,
 

If you submitted them online, you can still view the full calculation to see this. If not you can telephone 0300 200 3310 to ask for SA302 for the years concerned to allow you to work it out . Thank you .

I did submit them online so I can indeed view the calculations and I can see that for the last two years I can still amend them online so should I do that and then for the prior years back to 2020 write to HMRC about overpayment relief? Or should I just write to HMRC about all the years even the ones for which I can still amend returns online? Hope that makes sense! Many thanks.

Hi,
You can now only amend the 2022 to 2023 return online, earlier years will need to be done by us.
Thank you.
 

I have a question around this comment from HMRC Admin 19, "From the UK's perspective, an IRA in not a pension and so, it is not taxed as a pension, irrespective of its status in the USA. It is treated as a savings account and taxed in the UK, under the rules for interest. It is not covered by the tax treaty on pensions, but that of interest. Regular payments and lump sums are taxable as interest.." I understand that the IRA is not considered a pension by HMRC because it is not a UK pension. However, I'm confused that you say that it is not covered by the pension article of the tax treaty. I've been looking into this. Article 3o of the treaty defines pensions. The exchange of notes then specifically says that "individual retirement accounts" are understood to be pension schemes for the purposes of the treaty. So, irrespective of how HMRC views IRAs domestically, the treaty says that they are pensions and so Article 17 would apply to determine the tax position? Overall, I don't think that whether the distribution is taxed as interest or pension particularly matters unless there is a savings tax-free allowance to be used, or unless an inherited IRA is involved. If HMRC's argument is that an IRA is not a pension and they ignore the treaty, then if a person were to receive a lump sum from a deceased person's IRA then this would not be taxable in the UK? Because it is a distribution of "something" from an estate?

Hi IRAConfusionn,
As previously stated we can only provide general information / guidance in this forum.
Please clarify the question you wish answered on this latest post rather than post any comment accompanying this
If you wish an answer to a detailed question then you would need to contact our self assessment helpline on 0300 200 3310, contact our webchat facility at Contact-HMRC or seek professional advice.
Thank you

Hi HRMC Support, With the latest Budget changes on Pensions being included in IHT, I'm interested in how Traditional IRAs will be treated in that respect. As of now HMRC states that Traditional IRAs are not pensions and are treated as foreign savings accounts. Quite clearly this is the case as we can't utilise the 25% tax free pension withdrawal benefit in UK tax system, nor can we declare them as foreign pensions on our tax returns and must identify them on tax returns on section SA106 as foreign interest. My question is will HMRC treat Traditional IRAs as pensions for the purpose of the new IHT rules from April 2027, or will they be excluded from IHT or have they always been treated as a foreign savings accounts for IHT and what are the rules for IHT on traditional IRA accounts now and moving forward with the new IHT rules? If HMRC treat the Traditional IRA account as a pension for IHT purposes then is it a foreign pension or foreign savings account for personal taxation purposes or do we find ourselves in a situation it can be both foreign savings account and a foreign pensions account. I realise the new policy on IHT with pensions included is still under consultation...and hopefully Traditional IRAs in USA (which are same as a SIPP or DC pension scheme in UK) are clarified one way or another. Pension or Savings Account or em well both! PS I'm a UK resident and UK citizen.

Hi,
You will need to contact the IHT helpline for this on 0300 123 1072.
Thank you.