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Posted Tue, 16 Jan 2024 10:34:25 GMT by Simon.LSR
Hello. I am considering the tax treatment of the income of a US Citizen who is a UK tax resident. They receive a pension from the US Government as a result of service in the US Military and the US State Department. Per the UK/USA Double Tax Convention, Article 17 paras 1&2, such a pension should only be taxable in the US unless the recipient is both a resident and national of the UK. As this individual is not a UK national, this pension income is not taxable in the UK. Could you please confirm?
Posted Thu, 18 Jan 2024 09:42:48 GMT by HMRC Admin 20
Hi Simon.LSR,
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.                                                                                                                                                                                                                                                                
As  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.’ 

Thank you.
Posted Thu, 18 Jan 2024 10:17:07 GMT by Simon.LSR
Thanks for the reply. I disagree with your analysis however because of the specific source of the pension. Whilst I agree with your analysis for general Pensions from the US, this pension is specifically from government service and therefore Article 19(2) applies which states 2. Notwithstanding the provisions of paragraphs 21 and 2 of Article 17 of this Convention: (a) any pension paid by, or out of funds created by, a Contracting State of a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall, subject to the provisions of sub-paragraph b) of this paragraph, be taxable only in that State; (b) such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State. As I stated in my original question, the source of the US pension is military and state department which are both defined as being 'in respect of services rendered' to the US and so per paragraph 1 as quoted are taxable only in the state to which such service was rendered. Per paragraph 2, this would only change if the individual receiving the pension was not only a resident of the UK but also a citizen of the UK. As the individual in this scenario is a US citizen, paragraph 2 would not apply and we're back to the terms of paragraph 1 - ie it's taxable only in the US. And given Article 18(2) is a 'nothwithstanding' clause, this supersedes the terms of article 17. Surely this is the correct reading of the treaty?
Posted Mon, 22 Jan 2024 11:19:11 GMT by HMRC Admin 32

Article 19 (2 and 3) is more appropriate to this. As a national of the US, you would only delcare it in the US.

Thank you.
Posted Thu, 15 Feb 2024 19:05:04 GMT by
What if you are a dual citizen?
Posted Tue, 20 Feb 2024 11:32:56 GMT by HMRC Admin 32

In most cases, US government pensions are taxable only by the IRS in the USA.  However, if you are in receipt of a US government pension, but you are resident in the UK and you are a UK national, then the tax treaty allows for HMRC to tax this pension as well. The IRS will have first rights to tax this pension. You would declare the pension in your self assessment tax return and claim a foreign tax credit for the tax paid in the US.

Thank you.

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