US Citizen/Residents Receiving a UK Pension; Taxable in the US or Not?

[Knoydart]

Hi,

I'm a US Citizen & reside in the US. I worked in the UK & will shortly be eligible to receive a UK Private Pension while I'm still working in the US. There will be an approximate 5-10 year period when I'll be in receipt of my UK pension & still working in the US.

The UK Pensions system does NOT deduct tax on pension payments since it is a different model. However I'd be bringing this into the US as I had all my UK bank accounts closed without my consent (allegedly due to some anti money laundering law) so I can't keep it off shore. 

I keep seeing "Tax Treaty" being mentioned whereby a foreign country has a bilateral agreement with the US to treat income in the manner where it's earned rather than where it's paid out to. But cannot find a definitive answer only some suggestion that if I were RETIRED in the US & I'd probably not pay tax on it. However I'll still be working, so while I'd fall under UK tax code as "RETIRED" (hence paying no tax) under US law I'm still "EMPLOYED" making it complicated.

Is anyone in the same boat as me & have the answer? I can't find anything that covers my situation.

[NCperson]

do any of these documents help?

https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions

see article 18: 

https://www.irs.gov/businesses/international-businesses/united-kingdom-uk-tax-treaty-documents

(1) Subject to the provisions of paragraph (2) of Article 19 (Government Service), any pension in
consideration of past employment and an annuity paid to an individual who is resident of a Contracting
State shall be taxed only in that State

sounds like this means that you are to pay taxes to the US and not the U.K.  as you are a resident of the US (a "Contracting State")  I don't see anything in that sentence that suggested 'retired', only a pension in consideration of 'past employment'. 

does any of this help?

[Knoydart]

Hi NCPerson.

The link the WE8Ben is confusing, the instructions say to use this form, but then the actual form says to use a W9 & there's no place to properly report it there.

As for the Tax Treaty link Article 17, section 1, b, this would sugest that if a UK pension is considered nontaxable in the UK then the UK-US Tax Treaty would mean it wasn't taxed in the US. However.....this is only what I THINK it means, I've not found anything that actually states it clearly & I've still no clear idea of where to report it & how to avoid paying taxes I'm not required to pay.

[NCperson]

I've read Article 17 of the 2001 treaty.

the treaty is set up so that the same income stream is not taxed by both countries.  Look at the very first page of the 2001 treaty document.

it is very clear in Article 17 paragraph 1a, that the pension is taxable only in the country based on where you reside;l both countries will not tax you: 

1. a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State

paragraph 1b is just saying that even though both countries have agreed that the pension payment is taxable, if one country decides it's NOT taxable if you are residing there, then it's not taxable THERE but doesn't cause it to be tax-free in the other country.  So let's say the UK decides it's not taxable in the UK if you were living there, that doesn't mean it's not taxable in the US if you are living there! 

As a US citizen, the US taxes your worldwide income that would include pensions received from working in other countries so it makes sense the US would ensure the treaty was worded this way.

i've tried to parse out paragraph 1b so it makes sense

b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State (this means the UK since that is where the pension was established) that would be exempt from taxation in that other State (since the word 'that' is used, it's still referring to the 'other Contracting  State', the UK) if the beneficial owner were a resident (so this applies if you were still living in the UK) thereof shall be exempt from taxation in the first

meantioned State (that first mentioned state is the UK because that is what was mentioned first in this paragraph)

why do you think that the UK pension is not taxable in the US? it very well could be that the UK pension is not withholding UK taxes because it knows you are residing in the US and by treaty, it's not taxable to the UK but only taxable in the US.  As noted the US taxes its citizens on their world wide income so even if the UK wouldn't tax it (for whatever reason) doesn't mean the US wouldn't tax it. 

[Knoydart]

UGH! And I thought this would be easily answered.

Well yes, the quote you gave me does say that. But then I go on to read a Department of the Treasury document that gives an example under Article 17 where a pension not taxed in one country isn't taxed by where the recipient is living. The problem is it only gives the example of a US citizen resigpding in the UK & receiving pension payments from a US based fund. 

"However, the State of residence, under subparagraph (b), must exempt from tax any
amount of such pensions or other similar remuneration that would be exempt from tax in the
State in which the pension scheme is established if the recipient were a resident of that State.
Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt
from tax in the United Kingdom to the same extent the distribution would be exempt from tax in
the United States if it were distributed to a U.S. resident. The same is true with respect to
distributions from a traditional IRA to the extent that the distribution represents a return of non-
deductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled
over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the
distribution would be exempt from tax in the United Kingdom."

What it doesn't say is what happens when it's the other way around. You'd think it would be bi-latteral, I've not found anything that says otherwise, but if only it were so simple as to be put in plain English!

[NCperson]

 before going any further, it is imperative to understand whether you have documented evidence whether the pension would be taxed by the UK if you resided in the UK.  Remember, paragraph 1a states that the pension is taxed, so i am not understanding what you are trying to prove. 

documented evidence' to me would be a letter from the Pension fund or something on their website stating such. 

Just because they are not withholding UK tax isn't enough evidence. 

again, the US takes the position that all your worldwide income is subject to US tax, so even if the UK doesn't tax the pension if you were a resident of the UK it doesn't mean that the US wouldn't tax the same payment if you are a resident of the US. 

I am unable to assist further unless you have obtained documentation of whether the UK taxes this pension so that we are dealing with facts. 

,maybe the reason you can't find what you are seeking, is that the pension is taxable?????

[Knoydart]

I'm not trying to "prove" anything, just find out if this is going to be taxed or not.

As for UK pensions they're not taxed unless you go over a certain limit, currently £12,500 AFAIK. However anything after that is tax paid, as in the tax is taken off at source. From the pensioner's point of view it's seamless & they don't have to worry. Anything they get is "Tax Free" because it's "Tax Paid" already.

So, so far I've seen documents that say it IS taxed in the US & documents that say it isnt. I've seen documents to say "report it on this form" only to read that form & see it say "in your case use a W9".

It's utterly, frustratingly confusing & I've not found any tax expert who has met anything like this before. Surely someone out there has been in my position & has the answer.

[NCperson]

is it possible you have your answer but are unwilling to accept it? 

1) the US taxes the world wide income of all its citizens

2) the UK and the US have agreed that pensions are taxable. 

3) the US and the UK have agreed to a treaty to ensure that the same dollar of income is not taxes by both counties and have rules to determine which country is going to tax the pension (it's based on residence).

4) the treaty further states that if one country wouldn't tax the pension if you lived there, doesn't mean the other country can't tax the pension.

5) you state that the UK pension is taxed by the UK over L12,000.  Therefore the US won't tax that because if it did, then the two countries would would taxing the same dollar which is against the treaty.

6) you state that the UK pension is not taxed by the UK under L12,000.  But again as stated in paragraph 1b of article 17, if the UK decides not to tax the pension and you are receiving the pension while living in the US, that doesn't preclude the US from taxing it. 

5) Private pensions are all taxed in the US. 

6) therefore your pension under L12000 is subject to tax (there are more rules, just like there are for US pensions, that contributions are not taxable upon distribution as part of the pension payment)

You are unlikely to find a black and white answer - that is why there are lawyers, CPAs and tax accountants.    

[Knoydart]

"is it possible you have your answer but are unwilling to accept it?"

The simple answer to this is "No" as would be clear if you read my posts that lay out where "i read one thing here...but another here".

Asking questions is simply that. Confusion is simply that. It's not "unwilling to accept" it's "What the hell is the right answer?"

I'm even on forums for UK ex-pats living in the US & receiving pensions & none of them agree either. Some have claimed to have had to pay tax, some have claimed that they did not, while some have claimed they pay only some tax.

How anyone can extract being "unwilling" from all this makes my head spin more than what I've read about the actual subject in question to begin with.

[tagteam]

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@Knoydart wrote:

Some have claimed to have had to pay tax, some have claimed that they did not, while some have claimed they pay only some tax.

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This probably is not going to be of much help, but I found the following link (it's a PDF) which I believe may provide at least a partial explanation of why some are paying "only some tax".

http://www.castroandco.com/documents/Form_8833_-_UK_Pension.pdf

[NCperson]

The “right” answer is what I laid out for the reasons I laid out ....it’s taxable unless...

A- it was already taxed by the UK
B- similar to US, it is return of the contribution which was contributed with post tax money

Have any of the other posts / blogs you’ve read laid out WHY they did nor did not pay the tax?

You are going to have to trust some one so might be worth hiring a tax lawyer that specialized in international taxes - that way you get “ peace of mind”

Lastly: worst case scenario is you don’t pay the tax and the IRS audits you...

[tagteam]

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@NCperson wrote:
You are going to have to trust some one so might be worth hiring a tax lawyer that specialized in international taxes - that way you get “ peace of mind”

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Then the OP might as well call the firm at the link below because that is where I found the completed form I posted earlier.

It does appear as if there is a treaty that would allow 25% of the pension to escape federal tax, however.

https://www.castroandco.com/blog/2018/february/us-tax-treatment-of-uk-pension/

[Lillian1]

I am retired and will be getting a lump sum from my uk state pension. Is this taxable in the US?