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bigduckontax, Accountant
Category: Tax
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I have been reading the answer you gave to the person enquiring

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I have been reading the answer you gave to the person enquiring about bringing in pension savings from Canada. I am in a similar position. I understand that the Canadian withholding tax cannot be offset as it is levied on the lump sum withdrawn, but the UK charge arises as a result of the disposal of the underlying assets. My question is whether the funds arising from the disposal of the underlying assets would therefore be subject to capital gains tax, rather than income tax?
Hello, I'm Keith and happy to help you with your question.
Under the Double Taxation Convention between the UK and Canada the tax levied on the lump sum withdrawn is taxed in Canada and that is an end to it. The tax deducted is not available as a tax credit against any UK taxation levied as, under the terms of the Convention, it is not taxable in the UK having been deemed to have been taxed in Canada.
You can find the Convention in full here:
I do hope I have been able to set your mind at rest on this matter.
Customer: replied 3 years ago.

Thanks for the response. In my situation, I moved back to the UK about 10 years ago and so the pension fund in Canada has grown. If the fund is sold and brought to the UK (after paying witholding tax in Canada), is the increase in value of the funds treated by HMRC as a Capital Gain or as Income ?


I would submit that this would be a Capital Gain. However, under the UK taxation regime the pension pot itself and any increase in value thereof would be outside the scope of UK taxation. Such taxation would only kick in when the fund crystalised into an actual pension by say the purchase of an annuity. The first 25% of the pot could be taken tax free anyway and the income derived from the remainder subject to normal UK Income Tax.
However, we have been overtaken by events. Under the new pension arrangements effective today you can, should you wish, withdraw your whole pension pot with no requirement to purchase a pension therewith. However, the sum withdrawn, after allowing the 25% tax free rule, would be taxed at your marginal rate of tax. This might push you into the 40% or even the 45% tax bracket and you could also loose your personal allowance of 10.6K.
Customer: replied 3 years ago.

Thank you, ***** ***** the pension is Canadian, I presume the UK 25% tax free rule would not apply. Even if it does, am I right that closing the fund and accessing the total proceeds (minus the 25% wh tax) would be an act of crystalising and the funds brought into the UK (either as annuity or as a single transfer) would be deemed as income and taxed at my marginal rate ?

Yes, that effectively is what happens if you take your whole pension pot as a lump sum; you are taxed at your marginal rate of tax on the whole shooting match. If you invest it in an annuity then, of course, only the income from the annuity is subject to UK Income Tax, again at your marginal rate.
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