US Social Security Benefits and the UK/USA DOUBLE TAXATION CONVENTION

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US Social Security Benefits and the UK/USA DOUBLE TAXATION CONVENTION


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Old 26th August 2010, 11:30 AM
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Question US Social Security Benefits and the UK/USA DOUBLE TAXATION CONVENTION

Does anyone have specific knowledge of how the UK/USA DOUBLE TAXATION CONVENTION applies to US Social Security retirement benefits paid to a US citizen resident in the UK. The language is in sufficiently twisted legalese to be difficult to interpret by a layman.

Article 17 Paragraph 1. b) seems to say that if a US pension benefit would not be taxable in the US if the recipient were resident there, then it is not taxable in the UK either.

Article 17 Paragraph 3 may be saying that there is an exception to the above specifically for Social Security payments, and under these circumstances they are taxable in the UK.

Has anyone had the experience to clarify this definitively? Thanks!

- Cowshill

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Old 30th August 2010, 08:37 PM
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Since no one else has taken this on, I’ll give it a shot. But it comes with some definite warnings:

Warning 1: I’m just a punter, and not a tax professional. I’m only aware of the basics due to my own interest in obtaining a US Social Security payment in the UK.

Warning 2: Never read a US Tax Treaty unless you fully understand the meaning of “Notwithstanding”, “saving clause”, and “exceptions”. For US citizens, the treaty benefits are generally only available to residents of the U.S. They generally are not available to U.S. citizens and resident aliens who do not reside in the U.S.

Read the Technical Explanation to the treaty. For the US-UK treaty it’s usually available additionally wherever you find the treaty under the file name “teus – uk”. But be aware that amendments are made to the treaty occasionally and are found in separate updates.

Warning 3: Make sure you known the difference between “Non-Dom”, “remittance”, and “arising basis” for UK taxes for HMRC.

For Article 17, two paragraphs are subject to the saving clause, and two paragraphs are “exceptions” to the saving clause. The technical explanation for the treaty contains the following clarification for Article 17, paragraph 3:
“Accordingly, a U.S. citizen who is a resident of the United Kingdom will not be subject to U.S. tax on any U.S. social security benefits,…..”

If you decide to take a treaty based position on your tax return, be sure to read IRS Form 8833.

I know this may not apply to everyone, and many will already be aware, but I’ll throw it in anyway. If you receive any income from a State pension or Company Pension (amongst others) from any sources outside of the US (does not meet the definition of a US pension) you will be subject to WEP, the Windfall Elimination Provision. Your Social Security benefits will be reduced accordingly.

Once you have the correct amount, the Social Security Administration will forward to your bank account in the UK that amount each month, subject to the daily applicable exchange rate, in Pounds Sterling. There will be no deductions, hence the requirement to understand HMRC rules. If you are classified by HMRC rules as being required to file under the “arising basis” or the “remittance basis” you will definitely pay UK tax on the amount. You’ll also need to know how to apply all this to your US 1040 tax return.

And, again, a final warning: this is an amateurs’ simplified response.

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Old 30th August 2010, 09:24 PM
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Just to correct myself!

"you will definitely pay UK tax on the amount." should be followed by "by any amount your income exceeds your personal allowance".

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