UK Pensions: 25% Lump Sum tax-free

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UK Pensions: 25% Lump Sum tax-free


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Old 8th July 2019, 04:08 PM
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Default UK Pensions: 25% Lump Sum tax-free

When I retired, I began to receive monthly payments from my Defined-Benefit pension. I also received 25% of the pension as a lump sum, free of tax.

Article 17 of the US-UK double tax treaty (https://assets.publishing.service.go...-_in_force.pdf) says in paragraphs 1 and 2:

Quote:
1) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
(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 that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first- mentioned State.
2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.
Paragraph 17(1) is protected from the saving clause, but paragraph 17(2) is not - therefore in theory the IRS could choose to assess US tax on the 25% UK-tax-free lump sum. This is pretty upsetting, for a UK-resident who has earned their UK-source lump sum fair and square and is fully entitled to enjoy it without being nagged at by US tax advisers or US tax software trying to make them hand over US tax on the sum.

It appears to me that there is a (legal and correct) solution to this, which is to exclude the lump sum from taxable income on the grounds that it is exempt by treaty.

The instructions for Form 8833 tell you that reporting is waived for the treaty-based return position “That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers.”

That’s what I would do, if I were a US-tax-return-filing UK-resident US citizen about to receive a lovely tax-free lump sum from a UK DB pension.

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Old 8th July 2019, 05:16 PM
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And that's what they used to teach us at one of the big public accounting firms (when I did my rotation through the tax department): taking an assertive position. Or as the folks at Nike would say: "Just do it."

If the IRS should ever come back with questions (highly unlikely) you just explain your position - and unless there are vast sums involved, chances are that'll be the end of it.
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Old 9th July 2019, 03:16 AM
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“Assertive” is a good word for it, IMO.

By not reporting one’s non-US-taxable as US-taxable, one asserts one’s right to the status of “innocent unless proven guilty.”

The burden of proof thus remains where it belongs - with the IRS.

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