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Posted Wed, 17 May 2023 13:44:48 GMT by grahamlu
Hi, I am a UK citizen and previously lived and worked for several years in the US, returning to the UK in 2018. During my time in the US I contributed to a 401K and a Roth IRA. In 2020 I withdraw as lump sum payments the entire balance of both 401K and Roth IRA accounts, declaring this on a 2020 US tax return, and electing to pay the tax over three years (2020, 2021, and 2022). I did not declare this on my UK tax return as I believe based on article 17 in DT19853 and the discussion under the thread "Double tax on US pension incomr"(*), that the lump-sum payments are not taxable in the UK and should not be declared in the UK, as they have been declared and taxed in the US. Is this the correct interpretation? I have now received a letter from HMRC indicating that I may have overseas assets, income or gains on which I have not paid the right amount of tax, and this is the only thing I can think it could be related to. Thanks! *
Posted Wed, 24 May 2023 08:19:57 GMT by HMRC Admin 19

Roth individual retirement accounts payments to a UK resident that are not taxable in the United States are not taxable in  the United Kingdom. You can see note 2 in the guidance below in relation to other pensions:

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

UK/US citizens resident in the UK are taxable on their IRA interest in the UK. IRAs are treated differently from Roth IRAs, 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

The guidance at DT19852, in the first link, implies that tax is not payable in the USA on this interest.

Thank you 
Posted Wed, 24 May 2023 08:54:49 GMT by grahamlu
Hi, Thank you for the reply. I took lump-sum withdrawals from a 401K, and from a Roth IRA. Under US tax the 401k withdrawals were taxed on their whole value, and the Roth IRA withdrawals were taxed on the gains only (as the Roth IRA is funded from post-tax income). The section 'Pensions (Article 17)' in DT19853 states that; "A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State." My understanding from that statement is that the lump-sum withdrawals from both 401K and Roth IRA should only be taxed in the US (as the state in which the pension scheme is established). Is that correct? Thank you.
Posted Thu, 25 May 2023 13:20:38 GMT by HMRC Admin 20
Hi grahamlu

That would apply only if the conditions at paragraph 1 were not met.

Thank you.
Posted Thu, 25 May 2023 14:37:47 GMT by grahamlu
Hi HMRC Admin 20, Apologies, I'm not sure I follow, and I'm not sure I understand which 'paragraph 1' you are referring to? I'll attempt to summarise and perhaps you would be kind enough to correct any errors; - I understand that traditional IRA interest would be taxable in the UK. I did not and do not have any traditional IRAs. I did have a Roth IRA. - I understand that Roth IRA payments that are not taxable in the US, are not taxable in the UK. The gains on the Roth IRA at the point I took the lump-sum payment were taxable in the US. Does this mean that I should have paid tax on the Roth IRA gains in the UK as well? Does this not fall under "lump-sum payments"? - I take that to mean that 401k lump-sum payments should then only be taxed in the US, based on the lump sum paragraph in DT19853? I would be grateful for any clarifications. Thanks in advance.
Posted Fri, 26 May 2023 16:27:38 GMT by HMRC Admin 10
Yes you will need to declare the income in the UK but you can then claim foreign tax credit relief for the USA tax to offset against the UK liability.

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