UK Pension Plans & US Tax Treatment

When a taxpayer is considered a US person for tax purposes, that means that they have to report their worldwide income on their US tax return. For tax purposes, a U.S. person typically includes:

• • • U.S. Citizen

    • Lawful Permanent Resident

    • Foreign National who meets the Substantial Presence Test

Unlike many other tax treaties that the United States has entered into, the tax treaty between the United States and the United Kingdom is very robust and very detailed on matters involving the taxation of pension plans. There are many components to the IRS rules involving the U.S. tax and reporting of foreign pension plans and Taxpayers should be aware of the different reporting requirements when they file their returns.

Reporting on FBAR, FATCA, 3520, and 8621

It is also important to note that beyond the US Taxation of Sweden Pension, Foreign pensions are also required to be reported on various IRS international reporting forms as well.

• • • FBAR (FinCEN Form 114)

    • Form 8938 (FATCA)

    • Form 8621 (PFIC)

    • Form 3520 (Trust and Rev 2020-17 Exception)

UK Pension Plans & US Tax Treatment

First, Personal vs Employment Retirement

At the outset, it is important to note that pension typically means a pension that is created through employment (similar to a U.S. 401K). If someone has a solely personal pension  — for example where they may have invested in a personal Aviva pension —  and it is not related to employment, the same rules below do not apply. With personal pension plans, the income may be taxable during the growth phase as well although oftentimes it may be considered PFIC, and then more complex tax rules come into play.

Private Pension vs Public Pension

It is also important to note, that there are usually distinctions between public pensions and private pensions. For the most part public pensions are only taxable in the country of source whereas a private pension is typically taxable in the country of residence as well depending on the specific type of pension and if the taxpayer qualifies for any treaty exceptions or limitations.

Contributions are ‘Typically’ Not Taxable

Taxpayers who are considered US persons who may be living overseas in the UK and earning a UK pension as part of their employment generally do not have to pay tax on the contributions made by the employer — similar to how the 401K works in the U.S. There are some limitations on the amount of excludable income, and the amount of the contributions overseas cannot exceed the maximum contribution deduction allowed for similarly situated Taxpayers in the U.S. — but if those threshold requirements are considered, the taxpayer may avoid initial tax on the contributions.

Growth of Income Within Pension

Throughout the life of the pension come with the funds will generally grow within the pension plan. Most practitioners take the position that as long as it is an employment pension plan in a foreign country that is a treaty country and in which no distributions are yet being made to the taxpayer, then the growth is generally not taxable. This is primarily for treaty countries such as the UK and employment-born pension plans. The IRS could feasibly dispute this position, but it is the generally accepted position by most experienced tax practitioners.

Distributions of Pension Income

When pensions are distributed, it is generally taxable to the taxpayer. Depending on whether or not the taxpayer paid foreign taxes abroad or possibly lives abroad and is relying on a treaty provision to be treated as a foreign resident– or otherwise meets an exception to the substantial presence test — can determine whether they will recognize any tax when the income is distributed.

Reporting Exceptions and Revenue Procedure 2020-17

In general, the UK pension plan is reported on the FBAR and Form 8938. Since it is technically considered a trust there is the concern that the pension plans would also be reported on Form 3520/3520-A — but based on revenue procedure 2020-17 taxpayers may be able to avoid reporting the pension on Forms 3520 and 3520-A. Likewise, while oftentimes foreign pension plans may have mutual funds in them taxpayers may also be able to avoid having to parse out the individual funds by relying on treasury regulation 1298 which contains an exception for certain trusts slash pension and treaty countries.

25% Tax-Free UK Sipp

The United States does not seem to agree with the position that some taxpayers would like to take in that they can exclude the same 25% tax-free distribution of their SIPP in the UK on their U.S. tax return. Various public rulings have been issued that affirm that the IRS will indeed tax that distribution.

Form 8833

Form 8833 is used by Taxpayers who want to take a Treaty Position on issues involving the applicability of tax rules when it involves the pension (and other tax-related matters).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.