In many of the articles we publish, we talk about financial “landmines” you need to avoid, and how setting one off can create financial issues that can be very difficult to resolve.

If you add in another metaphor about the difficulty of negotiating your way through a jungle at the same time, you start to get some idea of the complications around any UK pension assets you have if you are a British expat living in the US.

To look at this issue in more detail, in the latest of our ‘Ask An Expert’ podcasts, we spoke with Holly Caulder. Holly is an experienced dual-qualified partner at Buzzacott, an accountancy and tax advisory firm in London where she specialises in planning and advice solutions for US residents with non-US pensions.

In this article, you can read about five of the key points we spoke about that you need to be aware of when it comes to reporting your UK pensions.

1. It’s imperative to report any UK pensions you have correctly to the IRS

It may sound obvious, but if you have a UK pension and you are a US resident, you likely need to declare the arrangements each year on tax forms such as the Foreign Bank Account Report (FBAR) and Form 8938.

This is the case, even if it’s inactive and you have made no contributions, and have no intention of drawing from it at any time in the near future.

As a cross-border advice firm, we have come across many British expats who adopt an “out of sight, out of mind” attitude to their UK pensions. This can lead to significant financial penalties from the IRS.

You should be aware that any growth in the value of your UK pension funds would generally be treated as taxable income in the US by the IRS.

However, under the terms of the US-UK tax treaty, you can claim an exemption each year by completing Form 8833 and submitting it with your tax return.

2. You should plan any UK pension transactions carefully

If you have a series of different pension arrangements in the UK, such as old employer schemes, it can make sense to consolidate these into a single self-invested personal pension (SIPP).

You are likely to gain access to a wider range of investment opportunities, the ability to switch the fund into US Dollars, and could potentially benefit from lower administration charges, as well as having just a single account to manage.

However, even a simple process such as consolidation raises certain tax issues in the US.

For example, as SIPPs are effectively collective trusts, the IRS would want to tax any transfer  into such an arrangement.

In reality, the joint tax treaty can help protect you from such a federal tax charge. But, you need to be proactive when it comes to reporting this and ensure you are completing the correct forms when you submit these with your annual US tax return.

The key point here is to ensure you get expert advice before you do anything with your UK pension funds. Even a simple process such as consolidation can create tax issues if you are a resident in the US.

3. Individual US states have different rules relating to the taxation of UK pensions

With a few exceptions, such as Income Tax rates in Scotland, wherever you live in the UK, you will be subject to a single tax regime on your income managed by HMRC.

The same doesn’t apply in the US, where the individual 50 states have wide tax-raising powers, in addition to the federal taxes charged at a national level.

This means that when you are considering the tax implications of what you do with your UK pensions, you need to consider both federal and state taxes.

For example, Texas and Florida have no additional taxes on income, while at the other end of the scale, California seems to miss no opportunity to levy taxes on your UK pension funds, including potentially taxing the transfer of a UK pension to a SIPP.

Because of this complexity, it’s easy to end up paying more tax than you need to, unless you take advice from tax experts before taking any action.

4. Your UK tax-free cash may not necessarily be tax-free in the US

You need to be aware that any time you draw from your accrued UK pension fund while you are resident in the US, this is a potentially taxable event.

Importantly, this can apply equally to what’s known as the 25% tax-free cash entitlement as it does to any income from the remainder of your fund.

Without the US-UK tax treaty you have read about, your tax-free cash would actually be taxed as income at your marginal rate.

Even with the treaty in place, it’s not totally clear that these payments are tax-free in the US and if you do decide to seek such treatment you still need to complete Form 8833 and make reference to this in your annual tax return.

Again, be aware that you may be liable for tax at the state level, and we would strongly recommend you get expert advice in order to mitigate this as far as possible.

5. Income from your UK pension fund could be taxed twice unless you take action

As a result of the US-UK tax treaty, income from UK SIPPs to US residents is taxable in the US.

But as standard, HMRC will withhold tax at source when distributions are taken from a SIPP (distributions are paid via the PAYE system).

To mitigate the need to reclaim this from HMRC, for US tax residents UK withholding tax can be avoided altogether by obtaining a non-taxpayer (NT) code from the UK tax authorities. However, be aware that the process for obtaining an NT code can be laborious and could take up to two years.

Because of this, we would again recommend you get expert advice before drawing any income from your fund.

Get in touch

As you have probably appreciated from reading this article, expert advice is close to being imperative when it comes to the reporting and management of your UK-based pensions.

If you are a British expat living in the US and would like to talk about your own arrangements, please get in touch to arrange an exploratory Zoom call to talk through your options.

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