Episode 73
UK Pension and Inheritance Tax: What Legislative Changes in 2027 Mean for British-Connected Expats Abroad
Changes are coming to UK inheritance tax legislation. From April 2027, many expats with UK Self-Invested Personal Pensions (SIPPs) could face a 40% UK inheritance tax hit on pension values above the £325,000 nil-rate band, but the way the new rules are drafted may allow non-long-term UK residents to structure their SIPPs so that non-UK underlying assets sit outside the UK inheritance tax net.
Richard Taylor, dual UK/US citizen and Chartered Financial Planner, is joined by Tobias Gleed-Owen, Senior Associate at Birketts, to discuss the upcoming changes to SIPPs and inheritance tax. This episode of Expat Wealth explores how UK expats, or future recipients of a UK inheritance or pension, can prepare for the April 2027 changes. Richard and Tobias unpack how the draft UK rules will treat pensions for inheritance tax, why the position most people have assumed is likely wrong, and how looking through to the underlying investments in an SIPP may keep large portions of a UK pension outside the UK inheritance tax net.
In this episode, Richard and Tobias take a detailed look at:
The big picture: An overview of the 2027 UK inheritance tax change on pensions.
Practical planning opportunities: How to structure or restructure your SIPP investments.
What to do if you have an old defined benefit pension.
Pension Commencement Lump Sums: Whether or not the UK 25% “tax-free lump sum” is tax-free in the US.
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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
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Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.
ABOUT RICHARD:
Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.
As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).
Connect with Richard on LinkedIn
Richard Taylor:
[00:00:00 – 00:00:25]
You have someone with a 2 million pound sip, let’s say they’ve got, they’ve got the full nil rate band £325,000. But anything over that, the remaining 1600 $75,000, whatever pounds, whatever it is, that is going to be subject to UK inheritance tax at 40%. I mean we’re talking what, £600,000? Ish. Maybe a bit more. £600,000 before they weren’t going to suffer.
Toby Gleed Owens:
[00:00:25 – 00:00:42]
I’ll tell you that. My starting assumption is that it is not tax free in the us. I, I would not be comfortable telling a client to expect not to pay US tax. I would, I would recommend they start from an assumption that they would pay US tax and anything better than that is a win.
Richard Taylor:
[00:00:42 – 00:02:00]
Wow. There’s some real money at stake here. Welcome to Expat Wealth, a Plan first wealth podcast dedicated to helping ambitious expatriates in America and Americans overseas thrive. I’m your host Richard Taylor and Plan first wealth is the business I founded and run today and we work with successful expatriates, immigrants and internationally minded Americans to make the most of their opportunity and avoid the expat landmines. First, a quick disclaimer. While Plan First Wealth LLC is an SEC registered Investment Advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views and positions of Plan First Wealth. Information presented is for educational purposes only. Now if you aren’t already receiving our emails, please go to our website planfirstwealth.com and sign up there. It’s free and you’ll be notified every time we drop a new episode and so much more. Okay, let’s get back to this week’s show. Welcome everyone to a Ask An Expert show. I’m excited this week to be joined by Tobias Gleed. Owen Tobias is a senior associate in the Cambridge office of Burkitts where he advises international families, trustees and family offices on a wide range of cross border private client matters.
Toby Gleed Owens:
[00:02:01 – 00:02:50]
Thanks Richard. Yeah, that’s right. So I think I should say right at the outset that I am, I’m an English qualified solicitor. I’m not a U.S. attorney, but you’re quite right. So we have a dedicated team for us UK cross border individuals and structures, things like trusts and things like that. So I suppose what we are is US aware UK lawyers. We do a lot of work with US citizens in the uk. We do a lot of work with Brits in America or anybody who has significant interests on both sides or families, mixed marriages Trusts that have beneficiaries going one way or the other from wealth holding structures within the firm. We also do a lot of corporate tax work, so trading businesses, people opening businesses on each side as well as a full gamut of other things. Lots of property work, corporate work and immigration work and the like.
Richard Taylor:
[00:02:50 – 00:04:09]
Excellent. Okay. Right. Well, it’s a cross border stuff that we’re interested in today, the gnarly world of US UK tax trusts and pensions. And on that note, I seem to be on a bit of a UK pension push at the moment, which is, which is great. We recently had Chris hall on who you heard recently. We were talking about managing UK pensions and specifically PCLS treatment in the us which is something we’ll touch on in a second. But you and I recently had a conversation and you brought something to my attention that immediately piqued my interest and that is back to UK pensions and the upcoming changes. So for anyone who doesn’t know, the last couple of years there’s been a major overhaul of the UK domicile rules, but also how inheritance tax is going to be applied to UK pensions. UK inheritance tax is going to be applied to UK pensions and this has had far reaching consequences because we have lots of clients who had been basically not touching their UK pensions because they didn’t believe that they would suffer any UK inheritance tax. And now these rules are changing. From April 2027, UK pensions are going to fall within the UK inheritance tax net. And with the UK estate exemption being so low at 325,000 pounds, which is shockingly low compared to our US equivalent of about $15 million, this can add up very, very quickly. And you think there might be a solution?
Toby Gleed Owens:
[00:04:09 – 00:05:06]
Yeah, I do. Especially for your particular audience, I. E. People who are not long term resident in the uk. So to give it a bit of background. Yeah. You said the domicile rules changed. That’s quite right. So now we in a tax concept we no longer talk about domicile, we talk about long term residence domicile. I do still talk about in other fields to do with succession planning and estate planning, but for tax it’s now residency only, broadly speaking, 10 years UK resident. Have you been 10 years UK residential in the last 20 years? If yes, you’re a long term resident, if no you’re not. For the person who is long term resident, it’s not just UK pensions that are going forward within inheritance tax, it’s all pensions everywhere and everything that looks like a pension. The legal term for that is a cunup. So a Qualifying non UK pension scheme. But that basically covers a very broad gamut of a lot of things that look like pensions. Most IRAs for example, would count as a QNUPs and so they may have been within subject to inheritance tax anyway.
Richard Taylor:
[00:05:06 – 00:05:11]
Okay, so if you’re, if you’re within that 10 year time frame, if you’ve.
Toby Gleed Owens:
[00:05:11 – 00:05:13]
Been 10 years UK resident in the last 20.
Richard Taylor:
[00:05:13 – 00:05:20]
Oh, it’s your worldwide assets, isn’t it? You’re still UK domicile, you’re a long term resident, your worldwide assets are going to get caught.
Toby Gleed Owens:
[00:05:20 – 00:05:24]
That’s everything. Yes. And now including pensions and things that look like pensions.
Richard Taylor:
[00:05:24 – 00:05:25]
Yeah.
Toby Gleed Owens:
[00:05:25 – 00:09:43]
It’s fair to say that most U.S. retirement accounts might have been within the scope of inheritance tax anyway for other reasons. But yes. So it’s not just UK pensions that are going to be caught by some of these rules. But for your audience, I expect most people on this call, most people listening to this are not long term residents in the uk. They might have spent a significant period of time out of the UK and so what they’re really thinking about is their UK pension. I must add the caveat that the UK government is still consulting on some of these changes, but we do have draft legislation giving most of the key information about how this inheritance tax charge is going to apply. It is in draft. In theory, some things could change. But most of the things the government is consulting on now are technicalities about how tax is going to be reported, quite what the pension scheme people do when somebody dies, how they actually file these taxes and pay them, that sort of thing. The actual framework of how the tax charge is calculated, I would be fairly surprised if it changed, but it’s possible. The key thing is that I think there has been a wrong assumption by, and a fair assumption, but a wrong one that a UK pension is a UK asset for inheritance tax purposes. And that is not necessarily the case. The key issue is that under the way that this tax charge has been framed, the way it’s written is that a person for inheritance tax purposes is treated as though they personally owned the assets in the pension that can be used to pay a death benefit on their death. Now if you’re talking about a really large, you know, multi member institutional pension scheme or something like that, this could get quite complicated. You could have, you know, hundreds of members and all that sort of thing. It’s much simpler in a kind of sip, a small, you know, a small scheme for one or a small defined number of individuals of similar status. But you know, let’s take a Single member sipping scenario. Yes. A SIPP is a self invested personal pension. Just to keep things easy, we’ll talk about a single member. So the SIPP owns. What does it own? It might own UK assets investments, it might own foreign assets. Okay. When that member dies after 6 April 2027, the tax charge is based upon what would the tax be if they owned those assets personally? It literally says, you know, they are deemed as though they were beneficially entitled to the underlying assets of the pension and if a non UK resident did own foreign assets, they would not be subject to inheritance tax on them. Now, none of this is published HMRC opinion, but it’s pretty clear from the wording of the legislation that, you know, hey, it’s very similar to existing. For example, I don’t get too much into off topic here, but to give a little bit more credence to what I’m saying, for example, HMRC go to the lengths to, when they’re talking about which inheritance tax exemptions apply for these assets, they say, you know, you can get spouse relief if your pension death benefit is going to a spouse. You could get spouse relief for it. You could get charity relief if a pension was going to a charity. They expressly say in the legislation, you cannot have business property relief on these pension assets. And there would be no need to say that if the tax charge was being applied on the sort of nebulous overall pension wrapper as a whole, because it could never possibly be a business asset. You would only need to exclude it if the tax charge is being applied on the underlying asset. So it’s another useful indicator. I’ll give you another one. There is already in the UK certain forms of trust which generate an inheritance tax charge when a beneficiary dies. What I’m talking about certain sort of life interest trusts. I’m not going to get too into that. That’s not our subject today. In those trusts, they are transparent for inheritance tax purposes. The person who dies, they are taxed as though they own the underlying assets. It’s very well established that foreign assets can be excluded property, they can be outside the wrapper, even if it’s a UK trust. And it’s the same wording, they use the same wording in the legislation. It’s, you know, the person is deemed as though they owned the underlying assets. The wrapper is transparent. So the conclusion of that is it creates a really good planning opportunity.
Richard Taylor:
[00:09:43 – 00:09:52]
Really good planning opportunity. And it sounds like, are you quite confident in this then, based on this additional kind of the dots that you’re joining.
Toby Gleed Owens:
[00:09:52 – 00:10:06]
You know, I do have to caveat that there’s a possibility that this could, that they could tweak the draft legislation before it’s enacted. I think that’s relatively unlikely. But I have to say that, you know, it’s not, it’s not yet current enacted law in the uk.
Richard Taylor:
[00:10:06 – 00:12:26]
Can I just like take a minute to just bring this live for people? Because, you know, it’s very easy for me to talk about pensions and inheritance tax. Everyone gets lost. This is potentially massive. Most of the people who come to the us, it’s an intercompany transfer. They’re doing well at their existing company, they’ve built up assets in the uk, they come to the US and they do well in the us, they’ve got sizable pensions. A lot of clients have multimillion dollar SIPs that most people end up in an international SIP. They have multimillion dollar SIPs and for a lot of these clients, they don’t need that to fund their retirement and they’ve just left these assets to continue appreciating tax free until recently saved from the knowledge that they wouldn’t suffer inheritance tax on them. And then this new legislation has come out and it’s like a bomb has gone off and everyone has radically changed how they’re going to treat this, this asset because it’s a lot of tax. Let’s just use my, let’s go back into pounds because it’s easier. You have someone with a 2 million pound sip. Sounds like a lot of money, but there’s lots of them here in the US. £2 million in a SIP. It’s their only US asset now under the. From April 2027 when they pass away, it’s a UK asset. Let’s say they’ve got, they’ve got the full nil rate band £325,000. But anything over that, the remaining 1600 $75,000, whatever pounds, whatever it is, that is going to be subject to UK inheritance tax at 40%. We were talking, what, £600,000? Ish, maybe a bit more. £600,000 before they weren’t going to suffer. And I assumed, and thus far I’ve heard no one else suggest any other possible outcome that that was done at the pension level. The pension is a UK situs asset, therefore UK inheritance tax is going to apply to the pension. But what you’re saying is. No, it matters what assets you’re holding, like the US, 2 to an ISA, you’re going to look through the pension, they’re going to see what assets you’re owning. And if those assets are UK, then yeah, they’re in the UK tax set, the UK status assets. But if they’re US or non US, but for obvious reasons, I’m specifically thinking US ETFs, mutual funds. If they’re US ETFs, mutual funds, HMRC will treat it on death as if you own them directly. And if they’re not UK assets, they’re not part of the UK Daenerys tax net. Is that right?
Toby Gleed Owens:
[00:12:26 – 00:14:47]
That is right. So this is the assumption which I think is, as I say, fair. That is, I think, what most people would assume from the way this is being published and it may be what HMRC are also assuming, but it is not the way the legislation is worded. And in a sense it isn’t normal practice in inheritance tax legislation where structures are brought, you know, where something that is in a trust, the pension is effectively a sort of trust, although it’s subject to different tax rules to normal trusts. Most UK pensions are effectively a settlement. And when settlements are brought into the scope of inheritance tax, historically, coherently and historically, they are usually done by making the wrapper transparent and then the underlying contents within it suddenly becomes relevant. Where those assets are cited suddenly becomes relevant. A lot of clients, particularly in the us, have faced this difficulty that there’s not a lot they can do to move their UK pension. Once upon a time it would have been possible to move to a qrops, a qualifying recognised overseas pension fund, somewhere else, something like Malta or something like that. Those schemes have all been closed down, both at the US end and at the UK end. In the UK you would now face a 25% transfer charge unless you’re moving to a scheme in the country where you’re resident and there basically aren’t any options. In the us, a lot of those schemes have come under fire from the IRS end as not being. They sort of. They don’t consider them to be pensions under the US Malta treaty. So a lot of the options have all disappeared for transferring, which is why a lot of your clients will continue to have a UK sip, despite not being often UK resident for some time, because there’s just not very much to do with it that hasn’t mattered previously. It’s been a great tax efficient vehicle. The UK US treaties are generally quite effective for whilst everything’s in the wrapper, it’s not going to be subject to tax anywhere. But basically, and until very recently, inheritance tax wasn’t a concern. That’s changing now, now, as I say, if you’re, if you’re married you can still get spouse relief on a pension for that reason. A lot of the kind of, the old kind of defined benefit style pensions, those ones that pay out sort of widow pensions and things like that after a first death, those are, not many of them are actually going to be chargeable for inheritance tax but, but yes, the sorts that you’re talking about here, the classic international SIP that is the key thing HMRC are looking at for bringing into the scope of inheritance tax.
Richard Taylor:
[00:14:49 – 00:15:50]
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Toby Gleed Owens:
[00:15:52 – 00:17:23]
The UK rules for what counts as a UK asset and what counts as a foreign asset are quite nuanced. There is a certain amount of greyness and uncertainty. It is quite common for somebody to think they own a foreign asset and HMRC to say, well, what you really own is some sort of UK asset representing a foreign asset or for HMRC to argue that the thing is itself UK cited. So this needs careful advice because of the myriad of different sorts of investments and financial products that exist and assets that derive their value from others cross borders in various ways and depository interests and certificates that derive their value from other holdings. You know, it needs to be done carefully. That’s certainly the sort of advice we give. I also think it’s something that the sipp, ideally the administrator of the SIPP, should also be comfortable with this. That is they should agree with this planning, they should take their own advice. Sometimes we give that sort of advice to administrators of SIPPs because under the new regime, both when somebody dies, when a pension member dies, both the executors of the pension member and the SIPP administrator will independently file tax returns to HMRC to say what the inheritance tax liability is. And you don’t want your SIP administrator saying something different to your executors. You don’t want the executors say, oh, zero tax, and the administrators say, yes, there’s lots of tax. You want a coherent, consistent filing position.
Richard Taylor:
[00:17:23 – 00:17:56]
We manage US international SIPs for people and we can easily put them on a platform and invest in US ETFs. And that might give the member our client confidence or a belief that it’s entirely therefore outside the UK inheritance tax net. But you’re saying that’s great, but you also got to get the SIPP trustee on board because when that day comes to pass and you do pass away, you want to make sure that what you are reporting back to HMRC is the same, that these assets are not UK and therefore they’re outside of the tax. You want to find a trustee who agrees with this.
Toby Gleed Owens:
[00:17:56 – 00:19:00]
Lots of pension administrators are in the process of taking this advice now anyway and starting to think about these things for the first time. So I expect that it won’t be very long until this is known and commonplace and fairly well established, especially once April 2027 passes and you start to have a few people dying and actually filing taxes under this new regime. So the thing is that we’re in the intermediate period now where the rules have been published mostly, but not everyone has had their advice yet. And both advisers and pension members and pension administrators are all in the process of getting their ducks in a row to figure out exactly what the position is on some of these nuance cases. So a few years down the line, it shouldn’t be hard. You know, all the pension administrators may all know this anyway, but right now, as you say, this has been. I think people have been a bit quiet or not considered this as fully yet. So you don’t want to be one of the first cases where a pension scheme administrator takes a different position because there’s not yet an established practice. I would suggest it would be good if they were on board with this.
Richard Taylor:
[00:19:00 – 00:19:16]
Yeah, absolutely. Okay. So I’m a pension member. I’m the example I mentioned before. I’ve got 2 million pounds or dollars in a. Say, 2, 3 million. What do I do? How do I. And I don’t want to drain my pension just for the sake of it. Just to get it out the. Just to avoid iht. What should I do?
Toby Gleed Owens:
[00:19:17 – 00:20:27]
And of course not because it’s yeah, it’s a great. The pension wrapper is a great tax efficient way to roll up, you know, for investments, you know, income and grown and growth tax free. So I. So why would you bring it down if you didn’t have to? No, I agree. And to some extent I rely on working with people like yourself, Richard, because I don’t. Apart from when I give written advice to a pension scheme, I don’t have a daily working relationship with the administrators of these things. You know, they’re not. They’re not the sort of people I’m on the phone with all the time, because I don’t have any daily. You know, I don’t manage investments, I don’t. They come to advisers only when they need to, rather than as a kind of frequent, constant part of their business. So it’s likely that the first port of call would be to contact you to be talking about this planning. I am very happy to give advice, either or both, to a pension member and to a pension scheme administrator. Different financial advisors will use different administrators, typically, and some of those will be ones I’ve dealt with before and some won’t. I think the person in your position, Richard, is going to be the important, the joining force between pension member administrator and tax advisor.
Richard Taylor:
[00:20:27 – 00:20:35]
A pension member, should they just restructure into U.S. eTFs, or should they get. Should they get something to protect themselves here, to take a position. Because you’re taking a position really, aren’t you?
Toby Gleed Owens:
[00:20:36 – 00:21:19]
You are, you are, and I do. I would recommend that as part of wider UK estate and tax planning, it’s worth having proper advice, especially because the sums here are quite substantial, you know, as you say, you know, if it’s a tiny sip, so, you know, maybe you don’t need it. But if you’re talking about a fairly substantial part of your estate, a sum for which a tax charge of 40% on values above 325,000 would be a significant sum, then I would suggest that it’s worth paying a much smaller sum now to get proper advice, something that you can rely on, something that you’ve got the backing of sort of regulated insured advice on from within the uk jurisdiction.
Richard Taylor:
[00:21:19 – 00:21:24]
Yeah, 100%, I agree. Wow. There’s some real money at stake here.
Toby Gleed Owens:
[00:21:25 – 00:22:04]
There is. And if you think about it, it makes sense. Because the UK inheritance tax regime is designed around the fact that a person who is personally outside of scope of inheritance tax should only be subject to inheritance tax on assets in the uk. It’s not particularly surprising that we would end up With a result where, you know, just because it’s in a wrapper somewhere, it’s not surprising that a non UK long term resident should be able to invest offshore and not be subject to inheritance tax on those offshore investments, even though it’s within a wrap up.
Richard Taylor:
[00:22:04 – 00:23:03]
This is for folks who have got UK pensions. We’re thinking specifically about SIPPs, but this could be someone who’s got multiple old school defined contribution pensions that they haven’t yet tied it up into a sip. Defined benefit pensions, final salary pensions, they’re probably outside of this net conversation. But if you have substantial legacy UK pension assets that you’ve either already wrapped up into a SIP or you haven’t yet anything over the 325,000 pound nil rate band in the UK. And bear in mind, if you have other UK Citus assets, if you have money in bank accounts, if you have a UK property, that’s all going to eat into your UK nil rate band as well. But once that nil rate band has been exhausted, anything over and above that from April 2027 is going to be subject to UK inheritance tax at 40%. This can be a very, very big number. And, and we believe you believe that there may be or there is a workable solution to this. So if this applies to you, get in touch, because there might be some action you can take to protect your family.
Toby Gleed Owens:
[00:23:04 – 00:24:17]
I’d suggest that this is, apart from being an incentive to take advice, this is probably also an incentive to actually do that tidying up into a SIP exercise, because I expect you’re going to have a lot more difficulty dealing with institutional pension funds. You know, you have no control over what they invest in generally, and most of them are just going to be holding standard UK investment products. So in theory, you know, the same analysis I’m talking about could apply if some of those schemes do invest overseas without using sort of UK intermediary products. But that’s entirely outside of your control and you don’t want to be in a situation where your tax exposure is outside of your control, I’d suggest it’s an incentive to begin wrapping these things up into a SIP, if you can, and carrying out that planning exercise. I’m sure, Richard, you sort of steer clients in the right direction of how to do that. I should say in theory, the old defined benefit pensions could apply if you have an unmarried partner who would benefit from them after your death. So it is potentially, you know, some of them, I called it a widow’s pension. But strictly often these days they will pay out to a sort of cohabiting long term unmarried partner and that person could be stung for inheritance tax on that sort of pension as well.
Richard Taylor:
[00:24:18 – 00:24:19]
Okay. Okay.
Toby Gleed Owens:
[00:24:19 – 00:24:49]
So perhaps another reason to consider my regulator prohibits me from advising on clients on the conversion of pensions, you know, from, from a defined benefit scheme selling out into it. That’s, that’s definitely outside of the sort of area that I can advise like a client to directly on the numbers and on what’s a good deal and what’s not and that sort of thing. That’s very much outside my regulation. But, but this is, this is perhaps another reason to, to reconsider that if, if you are likely to get an inheritance tax staying on a defined benefit.
Richard Taylor:
[00:24:49 – 00:25:21]
Pension, I need to ask you the question we’re asked the most, PCLs. So I know you’re not a US tax attorney, US tax advisor per se, but obviously you’re familiar with this issue, which is, is the 25% tax free lump sum. That doesn’t necessarily have to be taken as a lump sum, but that’s where it’s colloquially referred to in the uk Officially called the PCLS Pension commencement. Lump sum. Tax free in the uk Is it tax free in the us yes or no? I’ll accept. No, no. Prevaricating.
Toby Gleed Owens:
[00:25:24 – 00:25:26]
When, when taken by an American resident.
Richard Taylor:
[00:25:26 – 00:25:36]
Yes, sorry. When taken by an American resident or I guess a US citizen in the uk. But I’m thinking particularly about what clients in, in the U.S. well, I’ll tell.
Toby Gleed Owens:
[00:25:36 – 00:25:40]
You, I’ll tell you that my starting assumption is that it is not tax free in the US.
Richard Taylor:
[00:25:40 – 00:25:41]
It’s not tax free.
Toby Gleed Owens:
[00:25:41 – 00:29:13]
Yeah. I would expect to face a US tax bill. As you’re hinting at. There is a certain amount of greyness in this area and the result of that is that some clients win. They somehow manage to take a different position and the IRS accepts it. But I would not be comfortable telling a client to expect not to pay US Tax. I would recommend they start from an assumption that they would pay US tax and anything better than that is a win. So the reason for that. Many of your listeners may have heard previous speakers talk about the treaty between the US and the uk. So the wording of the treaty and treaty advice is something we give a lot of. By the way, as lawyers, we don’t tend to be involved in kind of crunching the numbers on pensions, helping people calculate their exact sums that they can take out or exact tax kind of triggered by it, but we do give a lot of sort of a legal opinion on our view on a treaty interpretation. So the way the treaty is worded effectively says that the starting point is a non lump sum. And unfortunately lump sum is not defined here. But a non lump sum is primarily taxable in the country where the receiver is a resident. A lump sum is taxable in the country where the scheme is based. But that is all undermined by a clause that the US negotiates into all of their tax treaties, which allows them to have a sort of secondary right to tax their residents and their citizens, even if the treaty would otherwise say no. There are certain parts of the treaty that exclude that. So for instance, assets within a UK sip, for example, are not subject to American tax. And the treaty, even a US citizen knows they’re not paying US tax on things in their UK pension. But for this purpose, the US does have a right to apply US federal income tax to a lump sum out of a UK pension scheme. Now, whether it is a lump sum or not is a good question. We used to give quite a lot of advice to people on exactly what counts as a lump sum. How should you structure it to make it a lump sum or to not make it a lump sum? We’d often say to people, you probably should take 100% of it if you really want it to be a lump sum, just to be absolutely clear cut. And if you definitely don’t want it to be called a lump sum, you should probably split it into at least six. That was sort of our sort of rule of thumb. But a lot of that. The need for that planning has now fallen away because hmrc, the UK Tax office, have now sort of clued onto the idea that they can also use this same clause in the treaty. So the US savings clause, it doesn’t actually say the US may tax its residents and citizens, it says either country can. The result of that is that the uk, even if it’s a UK resident taking a lump sum, like a complete withdrawal from a US ira, the receiver is UK resident. HMRC have started to take the view only very recently that, you know what, they can tax it, because this clause exists in the treaty to override they can tax a UK resident regardless of whether the treaty would otherwise allow it. The US would have the primary taxing, right. You know, you primarily submit higher filings in the us, but the UK can top it up. So that just caused the distinction between lump sums and non lump sums to become less relevant. There are a couple of exceptions. Certain government pension schemes, certain international organisation pension schemes are subject to some different rules. But the typical private sep or private, you know, IRA would be going the other way. I would take the view that if you’re resident in either the UK or the US you should expect the country in which you’re resident into to apply.
Richard Taylor:
[00:29:13 – 00:30:04]
Tax whether you’re taking it as a lump sum. I’ve had cross border tax advisors come on and say they think that you can take it as a lump sum and it’s tax free. I’ve had Chris on recently who said lump sum taxable but if you take it as a periodic payment there might be a case for it. He wasn’t, he wasn’t, he was equivocal, you know, because you have to be. But your position is like look, no, with this, with the UK now taking a stance on the savings clause. By the way, isn’t this just the most American thing ever? You go to the trouble of negotiating tax treaties but then you just stick in a savers clause that says basically we’re just going to disregard it where we want. It’s like I remember the first time I learned that some states don’t follow the federal tax treaty like California, like so the federal government can go to all this trouble of negotiating tax treaties which itself sticks full of savings clauses and then California just goes, do you know what? I don’t think we’re going to bother following these. I mean this system is wild in.
Toby Gleed Owens:
[00:30:04 – 00:30:37]
The world of international tax planning. You do quickly get wise to the fact that the US government has considerable negotiating power in its treaties. And a good example is the way that every time I open a bank account as a fully British person, I still have to declare whether or not I’m a US connected person. I don’t have to declare whether I’m connected to any other country. The bank isn’t doing paperwork on behalf of the French or the Chinese or any other government, but they are apparently doing paperwork on behalf of the US government to identify US people abroad.
Richard Taylor:
[00:30:39 – 00:31:20]
Okay folks, so we have good news for you, we have bad news for you, we have good news for you on the IHT front, the UK IHT front and we have maybe less welcome news on the PCLS front. But this whole PCLS thing know you talk to five different tax advisors, you get five different answers. It’s about you doing your own research and finding someone you’re comfortable with and happy with and, and, and, and, and, and I think that’s the best you can do. But I will always, always say seek cross border tax advice. Don’t do this on your own. Just if you’re an expat you’ve got substantial assets, you’re messing with IRS and hmrc. Just seek good advice. It’s a protection as much as anything.
Toby Gleed Owens:
[00:31:21 – 00:31:50]
There are things that your tax advisor might try if it’s too late to plan around them. You know, if you’ve already taken a lump sum and now you’ve gone to them to ask what your tax bill is, then, you know, that’s the sort of situation where a tax advisor might attempt, you know, the best form of tax reporting for you. And some people might get away with that, and some people might get slapped with penalties for that. But there’s a difference between what you do when it’s too late to do anything else as a last resort and what you should do with good advice going in.
Richard Taylor:
[00:31:51 – 00:31:56]
Excellent. Right. Well, on that note, thank you for coming in today, Tobias. Can you tell people where they can find you?
Toby Gleed Owens:
[00:31:56 – 00:32:15]
Yeah, absolutely. So my firm is called Birketts B I R K E double T S. My name, I think is probably on the screen if you just Google me. There’s not that many Tobias Kalidoans in the world, so you should pretty quickly find me. As I say we’re. I say my firm, but it’s a firm of 1200 people and it certainly doesn’t belong to me.
Richard Taylor:
[00:32:15 – 00:32:21]
So update the website. I said 700 at the beginning, which I now pulled that straight from the website. So.
Toby Gleed Owens:
[00:32:21 – 00:32:35]
- 700 lawyers. Sorry, 700. It’s the. It’s it for. I believe it’s there. 700 or thereabout lawyers. I think personally that the. The non lawyers in the firm make a valuable contribution and should be included when one talks about the headcount. I agree.
Richard Taylor:
[00:32:37 – 00:32:38]
Great. Well, listen, thank you for coming in.
Toby Gleed Owens:
[00:32:39 – 00:32:41]
It’s been an absolute pleasure. Thanks very much for having me on, Richard.
Richard Taylor:
[00:32:41 – 00:32:57]
You’re absolutely welcome. And thank you for bringing this to my attention. And then also thank you for coming on the podcast to talk about it. So this has got the potential to be very big. I think there’s a lot of money affected by this, and hopefully this can be a glimmer of light to. To avoid more tax, which. Which we all want to do. So thank you.
Toby Gleed Owens:
[00:32:57 – 00:32:58]
It’s a pleasure.
Richard Taylor:
[00:32:58 – 00:33:57]
Okay, see you soon. All right, folks, that’s another episode of Expat wealth under Our Belts. Thank you for listening. I appreciate it. And I appreciate you if you’re enjoying the show and would like to support the mission, which is to help ambitious expats thrive in America and ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it, that is to your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based financial planner and Wealth Manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you you can find us on our website, planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week.
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