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LEV
LEV, Tax Advisor
Category: UK Tax
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Experience:  Tax Advisor
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I was self employed in USA from 1987 to 1991 and built up a

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I was self employed in USA from 1987 to 1991 and built up a substantial Defined Contribution pension pot. I worked in UK from 1991 and retired in 2009 and have been drawing a final salary UK pension since then on which I took the maximum allowable lump sum. I now wish to cash in my USA pension pot and understand that the proceeds will be subject to 20% Federal Witholding Tax. What are the UK tax implications for the remaining 80%? What is my recommended strategy overall?

First of all - if you are UK resident and not US citizen - Pensions and Annuities paid from US sources are not subject of withholding. That is according to US-UK tax treaty - see here - http://www.treasury.gov/resource-center/tax- policy/treaties/Documents/uktreaty.pdf see page 19 - a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State. Thus - your US pension is NOT subject to 20% Federal Withholding Tax.

But will be taxable in UK. If you receive a pension from a foreign country while you're living in the UK it will be subject to UK tax rules. Generally 90% of your pension will be added to your UK taxable income.

See details here - http://www.hmrc.gov.uk/manuals/eimanual/EIM74500.htm

Please be aware that only periodic payments are exempt from US taxation.

See on the same page - 2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.

So lump sum distribution will be fully taxed in the US and in UK. However - you will be able to claim a foreign tax credit on your UK tax return for US taxes.

 

Let me know if you need any help.

Customer: replied 3 years ago.

My pension pot is with American Funds. They do not offer a pension annuity service. I would have to find a U.S. insurance company & transfer the fund to them (without a witholding tax) but then I would be drawing a pension in US dollars with the consequent risk down the line of exchange rates. American Funds say they will apply the 20% witholding tax if I take the entire pension pot back to the UK now. What concerns me is how HMRC would view the 80% repatriated to UK....would they tax it again? Overall, given tax considerations would I be better off keeping the pot in USA and drawing a US dollar pension or taking the 20% witholding hit & repatriating the 80% to UK? I understand that I would pay income tax on any pension income from USA just as I pay tax on my current UK final salary pension. Thank you.

American Funds say they will apply the 20% withholding tax if I take the entire pension pot back to the UK now.
That is correct - lump sum distribution is subject of US income taxes and withholding.

What concerns me is how HMRC would view the 80% repatriated to UK.....would they tax it again?
HMRC will treat the total amount of distribution (100% - not only 80%) as your taxable income. Yes - that income will be taxed in the US based on the source of income and in the UK - based on your residency. Your US and UK tax liabilities are determined separately - and generally not related (besides issues covered by the tax treaty referenced above)
However - because the same income is taxed in both jurisdictions - you will be able to claim a credit for US taxes on your UK tax return - thus effectively will avoid double taxation of the same income.
Also - withholding is not your actual tax liability. You would need to prepare your US tax return to determine your tax liability.

Overall, given tax considerations would I be better off keeping the pot in USA and drawing a US dollar pension or taking the 20% withholding hit & repatriating the 80% to UK?
There is no single answer as there are many factors to be considered. Such as your total income (now and in future), filing status, deductions, etc. Also you already mentioned the risk of future exchange rates - which hard to predict.
From US tax prospective - it would be better drawing a pension as periodic payments - and avoid tax liability (per tax treaty) plus - your investment will assumable continue to appreciate.
LEV and other UK Tax Specialists are ready to help you

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