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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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I lived in the U.S. for 25 years, returning 2.5 years ago. I

Customer Question

I lived in the U.S. for 25 years, returning 2.5 years ago. I no longer pay taxes in the US, I had a Green Card which was officially returned. I am turning 65 this year and may start to take money from an IRA, please can you tell me how is this taxed in the UK?
Submitted: 5 months ago.
Category: Tax
Expert:  bigduckontax replied 5 months ago.

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

There are about 15 different types of IRAs, could you be a little more specific as to which one you have so i can address you question fully?

As an UK resident you are liable to UK taxation of your world wide income. Any tax deducted by the States is, under the Double Taxation Treaty between the UK and the USA (and indeed some individual States within the Union as well) the same income stream cannot be taxed in both jurisdictions, allowed as a tax credit against any liability in the other. The Treaty does not, however, protect from differences in rates of taxation.

Customer: replied 5 months ago.
Hi Keith,
I have an IRA and a Roth IRA, I did have a 401k that was rolled into the IRA a few years ago. Not aware of any other types of IRA. Understand some of articles 18 and 19 but still don't know how IRA distributions are taxed in UK? Thanks.
Customer: replied 5 months ago.
Please note that a W-8BEN has been filed with the IRA administrator.
Customer: replied 5 months ago.
Article 17 states that pensions are taxed in the beneficiarys Contracting State
Expert:  bigduckontax replied 5 months ago.

Here is the IRS advice on the types of plan available:

'Types of Retirement Plans

Individual Retirement Arrangements (IRAs)
Roth IRAs

401(k) Plans
403(b) Plans

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
SEP Plans (Simplified Employee Pension)
SARSEP Plans (Salary Reduction Simplified Employee Pension)
Payroll Deduction IRAs

Profit-Sharing Plans
Defined Benefit Plans
Money Purchase Plans
Employee Stock Ownership Plans (ESOPs)

Governmental Plans

457 Plans
409A Nonqualified Deferred Compensation Plans'

I know from my US colleague that to we Brits the US system of pensions appears plumb crazy unless your ex employer is paying you a pension as happens in the UK. In the States you have a pension pot, don't often buy an annuity and just draw down from that. Assuming that you do not have an ex employer's pension you will be drawing down from a pot. In the UK that is akin to pension liberation and 25% of the drawdown is tax free and the balance taxed at your marginal rate of Income Tax (IT). If you are an EEA citizen you are entitled to a Personal Allowance, currently 11K thereafter taxed at 20% up to 32K and 40% thereafter. You will have to declare your pension income to HMRC on an annual self assessment tax return although if the income is low that Department may well tell you not to bother, but you must get their approval. The W-8BEN is to advise your pension provider that you are an overseas resident so there may be no IRS deductions from your drawdown.

You could, of course, get the whole pot transferred direct to an UK annuity provider which would simplify things immensely. Make sure that the sum involved does not pass through your hands or you will be hammered for UK IT.

If as you say the pension is taxed in the Contracting State then we must fall back on Double Taxation Treaty protection and the UK does not have such Treaties with all the States in the Union so I have to ask, which State?

Customer: replied 5 months ago.
I think you have confirmed what I understand to the case. I get the first 25 percent tax free but will pay taxes on the rest. I do file foreign pages in the UK. I lived in Massachusetts but no pay taxes in that State as I filed the I-407. Mine is an Individual Retirement Arrangement. It seems quite hard to find a platform provider in the UK who wants to deal with the paperwork to transfer an IRA or worry about the IRS.
Expert:  bigduckontax replied 5 months ago.

Firstly, sorry for the delay in response. I am a diabetic so was going through my insulin and breakfast routine.

Under the Treaty between the UK and the USA pension funds have 100% relief. Thus you will have to declare your pension income annually to HMRC for IT purposes unless they tell you not to bother.

Yes, these firms are quite prepared to sell you an annuity or accept an UK exchange, but going through the palaver of a foreign transfer is something even the big boys are not prepared to undertake. At least you are not being taxed in the USA. Welcome to UK taxation!

Customer: replied 5 months ago.
Many thanks. Yes, no escaping taxes.. but helpful to know what I should pay in the UK.
All the best.
Expert:  bigduckontax replied 5 months ago.

Yes, never forget Benjamin Franklin's quip that in life there are but two certainties, death and taxes!

Please be so kind as to rate me before you leave the Just Answer site.

Expert:  bigduckontax replied 5 months ago.

My colleague has made the following observation: it would appear that you will need the Double Taxation Relief:

'There is no transfer of a US IRA to any foreign account to avoid US tax. The US is going to withhold on any distribution from that account at a 30% rate. The IRA holder will not transfer any of that money to a UK account without withholding tax. That is the additional purpose of the, not only to advise they are a non US person but to also have tax withholding apply because they are a non US person. The person received a tax benefit on that money when it was first contributed in the 401k (pension) and they paid no tax when it was rolled over to the IRA. The tax treaty does not allow for any avoidance at all in the US on the tax.'

It is on the UK side that the 100% relief is given on the transfer.

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Customer: replied 5 months ago.
Thank you. So the U.S. will withhold taxes on any distribution but it will be tax free in the UK as the benefit was that the money was paid in pre tax dollars at the time of contribution while I was in the US. That would make sense. I will contact the U.S. Administrator with the knowledge that they will withhold tax. Complicated! But should not have to pay UK tax as well.
Expert:  bigduckontax replied 5 months ago.

Thank you for your support.

We all learn a little more every day!

Customer: replied 5 months ago.
Thank you for your advice.
All the best
Expert:  bigduckontax replied 5 months ago.

Delighted to have been of assistance.

Just one small point; these Treaties do not protect you from differences in rates of taxation.

Customer: replied 5 months ago.
Hmm thanks. So I may end up paying 30 percent, even though my UK rate would be 20 percent.
Expert:  bigduckontax replied 5 months ago.

Unfortunately, yes as these Treaties do not protect from differences in rates of taxation.

Customer: replied 5 months ago.
Thanks, ***** ***** is not all that clear so will see how much I pay in US taxes when I start the drawdown. Hope this helps others for the future . It is hard to find any info on the subject. Thank you.
Expert:  bigduckontax replied 5 months ago.

Maybe it won't be so bad in reality, otherwise it's just Sod's Law!

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