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bigduckontax, Accountant
Category: UK Tax
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I am a British expat, now a US resident based in Chicago. My

Customer Question

I am a British expat, now a US resident based in Chicago.
My father sadly passed away this year, and I inherited part of his estate with my sister.
Outside of his estate, he also held a UK Sipp Pension, which I was one of the benefactors.
This type of Pension, is held outside of his estate, and due to the new pension laws, that came into effect this April (my father was under 75), I was able to choose to receive the funds as 1) tax free lump sum 2) flexible income drawdown,
By taking option 2, I understand any income I take as draw down is deemed tax free in the UK. Would I be expected to pay tax in the US on this amount? Or is this covered by article 17 (i am struggling to interpret in this case).
I am not sure if you can help point out how I should be declaring such income in my US tax return?
Any advice is very welcome.
Kind regards,
Submitted: 1 year ago.
Category: UK Tax
Expert:  bigduckontax replied 1 year ago.

Hello Oliver, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Although 25% of the draw down would be tax free the balance would be taxed at your marginal rate of taxation. It is normal for pensions to be taxed in country of origin.

These would be taxable in the States as income, but under the Double Taxation Treaty between the UK and the USA which precludes the same income stream being taxed in both jurisdictions the tax paid in the UK is allowed as a tax credit against any any liability in the USA. The Treaty does not, however, protect you from differences in rates of tax. You should declare the full income including the 25% which in the UK is tax free to the IRS on your tax return. It is really very simple and a very common situation.

I do hope that my reply has been of assistance.

Expert:  bigduckontax replied 1 year ago.

Sorry, I should have mentioned that as a Brit you would be entitled to the normal Personal Allowance of 10.6K to offset any income under the UK regime.

Customer: replied 1 year ago.
Hi Keith,
Thanks for your response.
My understanding was that the rules changed and this 25% cap was removed.
Referencing the Hargreaves Lansdown website, I see they mention this and have seen this explained on numerous resoures. My question, was therefore, given this income would be treated with no tax in the UK, will the US system still tax me?
"In the event of your death whilst you are in drawdown your beneficiaries will have the following options under the current rules:
Death before age 75
Taking the pension as a lump sum, tax-free
Any beneficiary can inherit some or all of your remaining fund, tax free. They can do what they like with it. This is a major change.
Continuing with drawdown, with income paid tax free
A dependant or nominated beneficiary can continue to receive your fund as drawdown. They will not be taxed on this income.
Expert:  bigduckontax replied 1 year ago.

On the contrary, the rules changed and providing you are over 55 then your pension pot can be drawn down as I described. Under 55 this is only possible if you are in very poor health. Under 55 The Money Advice Service warn:

'You may see adverts which talk about early pension release, pension unlocking or even pension loans, but if they say you can unlock your pension before age 55 they are illegal, have hefty charges and are scams which can cost you dearly. Steer clear.'

Yes the US tax system will catch you. The IRS are quite clear on the matter:

'If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.'

Unless the pension fund has some unusual rules the draw down will be taxable in both countries, but tempered with the Treaty. However, I see where the advice is coming from. The fund is a legacy and thus once UK Inheritance Tax has been paid passes to you tax free in the UK. I can see problems because it is in a pension envelope, a right Tom Tiddlers ground for confusion and argument. .

In the States there may be a liability to State taxes on receipt of an inheritance. The eight states that impose an inheritance tax on receipt include Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. You will have to check locally.

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