What To Do With Your UK Pensions Once You Settle In The US | Ask An Expert with Holly Caulder

Richard:
[00:00:03 – 00:01:18]
Welcome to We’re the Brits in America, a Plan First Wealth podcast dedicated to helping ambitious expatriates and first generation immigrants thrive in America. 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 living across the US to make the most of their opportunity and avoid the expat landmines.
Okay, let’s get back to this week’s show.
Welcome to our Ask an expert show where I invite a fellow professional in the cross border space to come in and talk to me about the issues we think expats and immigrants in America need to be aware of if they are going to thrive here. My guest today is Holly Calder. Holly is a partner at Buzzacott in London. She is part of the Expatriate tax Services team specializing in U.S. and UK tax return compliance and advice to U.S. and UK domiciled individuals. Holly is both a chartered Tax advisor and an enrolled agent, I. E. She is a dual US and UK tax advisor and can represent taxpayers before IRS. For those who don’t know, Buzzacott are a significant player in the UK tax and accounting field, especially US UK cross border matters. So without further ado, let’s get into this.
Hi, Holly, welcome to We’re The Brits In America.

Holly:
[00:01:18 – 00:01:21]
Hi Richard, it’s great to be over here with you in New York.

Richard:
[00:01:21 – 00:01:31]
Welcome. Yeah, it’s pretty wild the city, isn’t it? Yeah, pretty crazy out there. Well, thank you for coming in. So first, Holly, will you just tell us who you are and a bit about your background?

Holly:
[00:01:31 – 00:01:45]
So I’m Holly, I’ve been at Buzzacott 13 years, I on the graduate scheme all those years ago and I’ve now got my dual US and UK qualifications. So we have about a team of 80 of us now, all doing us and. 80.

Richard:
[00:01:45 – 00:01:49]
80, yeah. US UK team is 80 strong.

Holly:
[00:01:49 – 00:02:01]
Yeah. So it’s kind of, I think, one of the biggest teams definitely in the UK doing that. And we’re all dual qualified. So all clients, you’d have three people working with you with both tax hats on, which really helps with tax preparation.

Richard:
[00:02:02 – 00:02:04]
Yes, each client has three people on the team.

Holly:
[00:02:04 – 00:02:18]
Yeah, three dedicated people. So if you. So for example, someone like me is in New York on a conference, you’ll have your two other team members to get hold of. So there’ll be me at partner level, a manager and a consultant. So always someone on standby if you have a tax emergency.

Richard:
[00:02:19 – 00:03:14]
Right. This is what you’re paying for people. But the cross border tax advisor space, we’re asked about it all the time and there’s different levels, Right. People want someone in the us, but the problem with someone in the US is even if they’re cross border, which most people aren’t, it’s generic cross border and really you need someone who’s got uk, US specific knowledge. Even cross border specialists, quote unquote in the US don’t have that. So then we look to the UK and again, there’s various degrees there, but as a minimum, you’re getting someone who’s US and UK qualified. So you understand the uk, you understand the US and you understand the interaction between the two. So there’s a premium for that. And then when you go beyond that and you’ve got a bench of 80 people and the expertise that comes with that, and each individual client has three people working on them at any time, that’s a particular level of service and expertise right there.

Holly:
[00:03:14 – 00:03:38]
Yeah, we’re a really big team and it helps. There’s a lot of knowledge in the team, so if I don’t know the answer, then I can reach out to one of one of my colleagues. There’s lots of a huge breadth of knowledge and we have lots of different specialisms. There’s people that do a lot of divorce work, a lot of corporate work. I do a lot of pension advice advice. So, yeah, even if you’ve got your three people, you also have those knowledge of 80 people within the team to help you.

Richard:
[00:03:38 – 00:04:09]
Good. We’re here to talk about pensions today, so that’s good. Let’s go through the life cycle. Right. Let’s think about you’re a British expat in America or someone who’s worked in London for a few years, picked up some UK pensions and you’ve moved to America. The example I see most often is you’ve got one or two old company pension schemes, employer pension schemes. Maybe you’ve got a personal pension you paid into briefly, maybe you’ve even got a stakeholder see them occasionally. What does someone with these pensions need to be aware of from a tax perspective?

Holly:
[00:04:09 – 00:05:05]
Yes, the very basic is to make sure you’re reporting those on all the foreign asset forms that file as part of your tax returns. So as the foreign bank account report, you’d be used to reporting your bank accounts as it’s kind of in the name. But pensions also need to be on there of whether it’s a personal pension or one of these old employer pensions. There’s the 8938. That’s very similar to the FBAR, but sits with the tax return. So that’s kind of fairly straightforward reporting, but if you miss it, the IRS can penalise you quite a lot. You’d also want to think, what happens when we come into tax? Those it might have been, if you were a US person, when you were contributing to them, how are those contributions included on your return? So if your employer is putting pension contributions into your employer employer plan, then in the uk, that wouldn’t be a taxable event, but the US would see those as taxable contributions.

Richard:
[00:05:05 – 00:05:08]
So wait, is this if you’re having contributions going while you’re in the us?

Holly:
[00:05:08 – 00:05:19]
Well, probably be more if you were still working in the uk. So if it was the UK employment, probably when you were still there, but it could be if you’re working in the us, if your UK employer is putting money into that pension.

Richard:
[00:05:19 – 00:05:30]
So I was thinking this purely. You’ve come to the US and these pensions are dormant, right? The money went into them when you were a UK resident, you’re no longer in the uk, there’s no more money going in. Okay, so do you have to worry about that then?

Holly:
[00:05:30 – 00:06:01]
So you need to think about the growth. So if there’s nothing going in, we just need to think about the growth. Do we need to include growth in investment value in those in those pensions? Do we need to include that as taxable income on the return or. Fortunately, there’s a US and UK double tax treaty which says even though the IRS don’t see this as a pension, it’s a UK pension. So let’s treat it for a pension in the US as well. So that means we can make a clever treaty claim on your return and that growth won’t be taxable on the us.

Richard:
[00:06:01 – 00:06:03]
Do I have to do this every year?

Holly:
[00:06:03 – 00:06:16]
Yes. So you do need to look at that growth every year. So every year you’d be putting it on your F bar, but you’d also need to look at the growth with the currency fluctuations. It might not be there is any growth, but you still need to be looking at it each year.

Richard:
[00:06:16 – 00:07:03]
This is interesting. Right, so base level, you’ve got a reporting requirement. Right? So base level, you’ve got these various UK pensions. You’ve not done anything with them. They’re still in like the original housing, personal pension, employer pension. As long as they’re over the reporting minimums, which they almost certainly are going to be because they’re very low, you’re going to have an FBAR requirement. So you have to file them individually on your FBARs alongside your foreign bank accounts and any foreign investment accounts that you might have. And almost certainly on your 8938. Right. That’s just reporting, forget growth, just whatever the value is each year, reporting them on those forms. Also, though, if you had a million pounds and it’s gone to 1.1 million, you need to account for that 100,000 and actively take a treaty exemption.

Holly:
[00:07:03 – 00:07:29]
Yeah. So, yeah, the treaty would probably be the default, but you might be able to do some clever planning. If you’d been living in the UK in the last 10 years, you might have access to foreign tax credits because the UK rates are so much higher than in the us. So you could opt to tax that growth and that would be handy because then when you eventually come to take that pension, that amount wouldn’t be taxed again. And those foreign tax credits, they’re just sitting there unused. So it can be some quite handy planning there.

Richard:
[00:07:29 – 00:07:38]
Is that going to apply more to if I was an American who went to the UK and then came back again, versus a Brit who was in the uk, you know, they moved out here and got a visa and then a green card.

Holly:
[00:07:39 – 00:07:59]
Yes, you needed to have been a US taxpayer at this point, those credits arose. But it’s fairly common, especially even just a Brit moving here and picking up a visa. That might be in that first year you had some deferred comp, so you’d have these. Access to carryovers are quite common. So, yeah, it can be really good planning in that sense.

Richard:
[00:07:59 – 00:08:26]
Okay, so there’s a planning opportunity, perhaps if you’ve got foreign tax credits to be cute with this, to offset some of those, which will reduce your future taxable, but just bog standard. If you have UK pensions and they are growing, then you should be active. No one’s doing this, by the way. I know your clients are, but I mean, no one in the wild who I come across. You need to be actively claiming a treaty exemption every year on the growth. Wow, 8833.

Holly:
[00:08:26 – 00:08:36]
Yes. So it’s just a page that goes with your tax return. You say which article of the treaty you’re using and give a bit of a summary. So it’s not. It’s just a kind of helpful plaster to help the problem.

Richard:
[00:08:36 – 00:08:39]
But if, you know, what if people aren’t doing this?

Holly:
[00:08:39 – 00:08:52]
Well, the irs, if they found out that you had this growth, they could audit your return and request that you pay the tax on it. Maybe then you’d use the treaty, but they’d be coming after you in the first instance for the tax. They wouldn’t be thinking, oh, you could.

Richard:
[00:08:52 – 00:09:05]
Treat it, exclude it, so then you can fight it. But then you’ve got the cost and the stress of fighting it rather than just getting it right up front. Yeah, I had an idea, but I didn’t know you meant to be reporting it. Making that treaty exemption every single year. Wow.

Holly:
[00:09:05 – 00:09:19]
Yeah, there can be some pensions where you’re excluded from that annual reporting, but you just need to be thinking about it, take that advice. Now, maybe that you don’t need to do it going forward, but it’s better to know than the IRS come after you and ask for many years of tax returns.

Richard:
[00:09:19 – 00:09:25]
Yeah, yeah, definitely it’s better than that. And then also what if you don’t have the records, you know?

Holly:
[00:09:25 – 00:09:45]
Yeah, well then we just, we need to think of a sensible approach. Sometimes UK pension providers aren’t going to be used to asking, answering questions on U. S Tax, so maybe it’s we, they should be able to give you a UK tax year statement and they should be, should be sending that to you anyway. Just make sure your addresses are up to date. Might be that you haven’t thought about that pension for 20 years.

Richard:
[00:09:46 – 00:10:45]
Okay, so we have reporting anyone with a, with a UK pension and honestly any financial asset reporting multiple forms, that takes people by surprise. Secondly, claiming an annual treaty exemption on the growth and maybe if there’s foreign tax credits and other stuff, there is some planning that might be able to be, to be applied to benefit your future self. Okay, so moving on from you’ve been here a few years, you finally decide, right, I’m going to tidy up my UK pensions. I’ve got these four or five disparate pots that kind of been neglected. When you’ve been in the US what everyone does is they just put them in the drawer with all the, the paperwork they don’t want to get around to doing and they just languish there and there’s an opportunity cost to that. But eventually they find someone like us perhaps or someone else and they think, right, we can get this into a better home and they’re going to do a rollover, they’re going to transfer into a sip. What do we need to be thinking of from a rollover? From a transfer perspective, when they’re sitting.

Holly:
[00:10:45 – 00:11:30]
In their employer plans, they’re kind of, that’s a category of pension for IRS purposes and you’ve got that protected employer status. When you’re thinking about moving into a sipp, that’s a Self invested pension plan, kind of in the name that’s a personal plan. So when that change of status happens, the IRS would want to tax that transfer, which may sound like bad news, like there could be hundreds of thousands of pounds in those plans. However, again, we have that handy treaty that we can use and there’s a clause that says, look, transfers between UK plans are not, shouldn’t be taxable in the US because they’re just going UK pension to UK pension, which isn’t taxable in the uk. So again, we can use that treaty protection, but make sure that you make the treaty clear.

Richard:
[00:11:30 – 00:12:04]
So again, it’s being proactive on your return, which for Anyone listing is 8833, form 8833 and saying you’re proactively making a treaty exemption. And as I understand it, this is important not just to hopefully avoid future issues, but to get the statute of limitations correctly right, because if these forms are missing, so we report the early ones, FR8938, there’s penalties associated with those forms if they’re missing, even when no tax is due. But also the missing forms can lead to the statute of limitations being open. And is that the same for 8833?

Holly:
[00:12:04 – 00:12:13]
If you haven’t filed the 8833, then that transfer is completely taxable. So it would just be. You’d be penalised, as if you’d not reported that foreign income, which.

Richard:
[00:12:14 – 00:12:15]
But again, you’d fight that, right?

Holly:
[00:12:15 – 00:12:28]
You’d say, yeah, yeah. So that’s why it’s important not to dismiss it, even though the treaty’s there to protect you, if you don’t make that claim, then the claim isn’t going to hold. So. Or the IRS are just going to come after you as if it didn’t exist.

Richard:
[00:12:28 – 00:12:33]
So have you ever had that happen? Have you ever had someone reach out to you saying, the IRS are coming after me because I’ve brought my pension.

Holly:
[00:12:34 – 00:12:51]
I haven’t seen it yet for a transfer, it’d be more. I think they’d start off by picking up, they know you’ve got that new pension or one of the old pensions and then they’d probably start working backwards. But information sharing, sharing is getting a lot stronger. So we are expecting more of that. All of those disclosure letters.

Richard:
[00:12:52 – 00:13:10]
I mean, again, just stepping outside the agenda slightly. Information sharing is getting more. And as they start to employ AI to trawl that information and cross reference with tax returns, I think that is a freight train coming at Tax International. People, folks, we Deal with that is a freight train coming at them.

Holly:
[00:13:10 – 00:13:31]
Yeah. And kind of a side point at the moment, there’s the very generous streamline procedures where you’re going to the IRS to kind of catch up with prior mistakes. But with AI, you know, they could. They could just halt that streamline procedure and penalize you on everything and assess the tax. So the more information they have, it’s just better to get ahead of things now.

Richard:
[00:13:31 – 00:13:50]
It really is 100% right. So from a federal perspective, that rollover should be tax free because it’s tax free in the UK and the treaty respects that. But you want to be sure to actively claim that treaty exemption on 8833. What about at the state level?

Holly:
[00:13:50 – 00:14:15]
So every state is different, unfortunately. So there’ll be some. If you’re in Florida or Texas, great. There’s no state tax, so you don’t need to worry about that. But there are unfortunately some nasty states that don’t allow federal treaty provisions. So here in New York, they do follow treaty provisions. So provided you’d use the treaty to exclude that transfer into the sipp, then New York will follow that.

Richard:
[00:14:15 – 00:14:18]
Do you have to do anything active there like you did with the 8833 or.

Holly:
[00:14:18 – 00:14:43]
No, because the New York will be the picking numbers. So it kind of flows through from the federal. That’s fine. California, they don’t follow treaty provisions, which is pretty cruel. So I think that was like a kind of you have to make an adjustment. So the 8833 would be on the federal return, but you’d have to add it back in as a California adjustment. And that can come as quite a big shock. So it’s. Again, just take that advice before you start transferring.

Richard:
[00:14:43 – 00:15:45]
I will never get over that fact. I will never, ever forget learning that California just decides not to follow her. And there’s what I think there’s about six or seven states. I think Connecticut’s another one. Pennsylvania’s another. I can’t remember Maryland, maybe Maryland. But the idea that the federal government goes to trouble of negotiating and installing a double tax agreement and then states can just disregard it blew my mind and I think will always blow my mind. What does this mean for people? Right. So you’ve got a million dollars in UK pensions. You roll them over into a SIP in New York, you file the 8833, you’ve now got a SIP, and you’ve not paid any tax until you start to take money out. You’ve done this in California. You’re okay Federally, but California’s going to want to tax that rollover right now. Right. So top rate of tax in California, 13%. I think on a million dollar rollover, that could be $130,000. And if you’re under 55 or 57 soon, when the age goes up, I think you can’t get access to that pension.

Holly:
[00:15:45 – 00:16:06]
Yeah. It’s a nasty dry tax charge. And the only upside on this is that if you’d pay tax on that transfer, then you build what’s called tax free basis for California state level. It doesn’t really help with the short term cash management. You’ve got to pay that tax, but it means later when you come to withdraw from that pension, that million dollars isn’t going to be taxed again in California.

Richard:
[00:16:06 – 00:16:13]
So it’s going to be taxed federally as income. But California, you’ll have basis in it. So you’ll only pay tax on the growth.

Holly:
[00:16:13 – 00:16:13]
Yeah.

Richard:
[00:16:14 – 00:16:17]
Which sounds like an accounting nightmare as well. Right. You have to keep track of all that.

Holly:
[00:16:17 – 00:16:20]
Yeah. And remember it though you probably wouldn’t forget having them.

Richard:
[00:16:21 – 00:16:25]
Yeah. No. But what about if you went from California to Florida?

Holly:
[00:16:25 – 00:16:30]
Yeah. So that basis, well, it would just be lost. Florida doesn’t have state tax.

Richard:
[00:16:30 – 00:16:30]
Yeah.

Holly:
[00:16:30 – 00:16:42]
That’s kind of the end of the conversation. Where it could get nasty is if they move to somewhere like New York, when you take withdrawal from that pension, they’re not going to respect that California state basis. So you could end up paying California tax on it and New York tax.

Richard:
[00:16:42 – 00:16:43]
Ouch.

Holly:
[00:16:43 – 00:16:45]
So, yeah, nasty.

Richard:
[00:16:45 – 00:16:46]
Yeah, that’s gonna hurt.

Holly:
[00:16:46 – 00:16:46]
Yeah.

Richard:
[00:16:46 – 00:17:12]
Yeah. You’ve got to be careful with that. If you’re in California and you’re going to stay in California and especially if you’re over 55 and can access it, then there’s an argument that it can definitely, you know, it can be a good planning opportunity. But what if you’re under 55 or you’re not quite sure where you’re going to end up, but also you don’t just want your old pensions languishing in these like old school, high cost contracts. Do you have options? Is there, is there a palatable option or are you just kind of hamstrung, you know?

Holly:
[00:17:12 – 00:17:31]
Yeah, it’s a pretty difficult situation. You might. When we’re looking at that taxable transfer, we might look back if it’s going to be taxable and we can’t use the treaty because we’re looking at a state. Is there any basis, if you’d made some personal contributions, that might help it slightly, but we’re talking about employer pensions here. It’s a difficult situation.

Richard:
[00:17:31 – 00:17:33]
If you have made some of those contributions, can that help?

Holly:
[00:17:34 – 00:17:44]
Yes. If you’ve got, say, let’s talk in dollars, a billion dollars. If a quarter of those were personal contributions, then you’d be taxed on that 750amount rather than the full amount.

Richard:
[00:17:45 – 00:18:10]
Okay. All right, so I’ve rolled it over into a sip. You’ve dodged state tax issues. You’re in a more reasonable state. You’ve always reported on your FBAR, you’ve always reported on your H938s. You’ve always taken treaty exemptions every year on your return, including when you rolled it over into a sip. But now you’re in a SIP rather than old school pensions and you’ve got additional reporting requirements, right?

Holly:
[00:18:11 – 00:18:27]
Yes. So most SIPs, pretty much all of them are held under a trust based arrangement. And again, the irs, they’re not seeing this as a pension, they’re just seeing that you’ve funded a foreign trust. So it’s not in the us, it’s in the uk.

Richard:
[00:18:27 – 00:18:29]
So we’re seeing SIP and they’re just seeing foreign trust.

Holly:
[00:18:29 – 00:19:18]
Yes. So you can use the treaty to protect the income, but it’s not going to protect filing. Stop you having filing requirements. So for a foreign, what’s called a foreign grant or trust because you set it up yourself, you need to file a 3520A and a 3520 and those two forms. It’s a bit like doing a set of accounts for a pension. So you’d report the underlying income and investments within the pension and also how they’re performing. It’s also just different reporting in the year of transfer. There’s a few extra boxes to fill in. And it’s really important you do this. I mean, this sounds crazy because it’s a pension plan, but the IRS really like penalizing people for not filing those forms starting at $10,000, sometimes 30% of the contributions. So it’s important that you, you do those annually.

Richard:
[00:19:18 – 00:19:21]
They really like finding people for this one, don’t they?

Holly:
[00:19:21 – 00:20:05]
Yeah, it’s one of their favorite, favorite, favorite things to do at the moment. There’s been talk to kind of, I think they’ve realized it is a bit ridiculous really for people with a foreign pension in a, you know, recognized country like the uk. So they’ve been talk over the years to prevent you having to do this, that they released a quite unhelpful bulletin which the way it was written excluded a UK sip. So they’re definitely kind of. It’s on their radar still, but they still love penalising people for them and can be quite a lengthy process. Even if you are non willful getting those penalties abated, they just keep. Especially if you are living in the us they can kind of try to lean your assets. So it gets pretty serious quite fast and it’s just better void.

Richard:
[00:20:06 – 00:20:17]
I just want to give people some sense here because you just think, oh, I’ve not done 35, 20. I wasn’t. There’s no tax due. How bad can it be? $10,000 you threw out and we always threw out. It’s just a starting point.

Holly:
[00:20:17 – 00:20:18]
Yeah.

Richard:
[00:20:18 – 00:20:48]
The year of the role, the, the contribution, you can get charged 30 or 35 of what goes in. I mean that’s serious, you know, a million dollar rollover, $300,000 penalty. If you do end up having penalties assessed and you have to fight them, well, that’s not a stress free or money free process either. We did an episode with Virginia Latore Jaeger about establishing reasonable cause and you involve a lawyer and you absolutely should. In my opinion. You’re talking at five grand. Starting at five grand there.

Holly:
[00:20:48 – 00:20:51]
Yeah. And then just all the chase in the irs.

Richard:
[00:20:51 – 00:20:51]
Yeah. It takes months.

Holly:
[00:20:51 – 00:21:33]
Even with that lawyer letter. You send it in, they don’t process it. I think they’re pretty overwhelmed in that. In that department. So it’s just. Yeah. The lawyer fees. We’d often get involved chasing the IRS when they send another notice threatening you for these penalties. Lots of people fall foul of this completely unwillfully. And there’s a procedure called the streamlined procedure which is a bit of an amnesty. If you’ve got assets or if you have foreign assets and you’ve missed some income off your return, then you can, with the help of a lawyer. We’d normally suggest, file like three years of these forms. If you’re in the US there might be a 5% asset penalty, but that’s still a lot better than this, like 30%, the whole pension. So it’s a really good thing.

Richard:
[00:21:33 – 00:22:34]
We’ve actually done an episode on Streamline with Chris Macklemore. So everyone who’s, who’s listening, if anyone’s listening to this, thinking, oh dear, I’m in non compliance number one. Just know that you and everyone else. I got to tell you, Hollywood, when we’re approached by someone, an expat is always an expat because that’s what we do. An immigrant, they’re always in some form of non compliance. Always the, the odd time that it’s not, is when someone approaches us who’s already a client of someone like you. Like most of the time people come to us, we’ll spot a problem and then we’ll refer to people like you. But occasionally someone will find us after speaking to someone like Buzzacott and, and you’ve already got them into shape. But everyone is in some form of non compliance. So if you listen to this and you think I’m in non compliance, so is everyone else. There are solutions, there are ways back into compliance to what we were saying before about AI and information sharing. Don’t sit on this, don’t bury your head in the sand, be proactive, take action, come in from the cold and then put it behind you. Yeah, always my advice.

Holly:
[00:22:34 – 00:22:40]
Take advice ahead of that move as well. That’s when it works the best, doesn’t it? I mean, often six years later, oops, I forgot to.

Richard:
[00:22:41 – 00:23:13]
That is the dream that, that eventually people realize, but no one does. And I just think part of the reason is the culture in the uk. I think it’s less about seeking this kind of advice and then part of it is just you got a million other things and you don’t think, oh, my benign index trackers in my isa, which is a case I’ve actually had recently, are going to cost me $30,000 that could have been completely avoided. You just don’t think that, you don’t think my benign sip is going to cause me any issues?

Holly:
[00:23:13 – 00:23:29]
Yeah, because like in the uk just far few people even file a tax return. If you’re just kind of a straightforward employee with an isa, then why, why do you even have tax filings in your head? But in the US pretty much everyone files. So yeah, it’s just, it’s quite a different culture in that sense.

Richard:
[00:23:29 – 00:23:31]
Do you find everyone’s in non compliance?

Holly:
[00:23:31 – 00:23:43]
I mean we have a huge, huge amount of work from such. Yes, yeah, yeah. I mean ideally all of our clients would speak to us before they make the move, wouldn’t they? But unfortunately they often don’t.

Richard:
[00:23:43 – 00:24:21]
And yeah, people underestimate the value in planning. With a professional, people see the cost. Oh, you’re going to charge me X thousand dollars to do my returns and do some planning. Great. Yeah. But over 20 or 30 years, what you can save by taking advantage of things like foreign tax credits and the other stuff that, that we get involved in, it can pale in comparison. Right, well this is an interesting one. I think everyone’s ears are going to prick up at this PCLS. So the 25% that is tax free in the UK. PCLS, pension, commencement, lump sum. How is that treated in the us?

Holly:
[00:24:22 – 00:24:57]
So again, we can defer back to that handy tax treaty. So without the treaty, it would be taxable in the US Even though it’s not taxable in the uk. But there’s a helpful clause in the treaty that says if something’s tax free in one country, the UK, then it’s also tax free in the US so we need to. Again, that 8833 comes out again, and we’d make that claim on the return. So at federal level, there wouldn’t be any federal tax on that, which is really handy because often these can be sizable chunks of taxable income. We don’t want to have 37 on that if there’s no UK.

Richard:
[00:24:58 – 00:25:16]
But, Holly, I can Google it right now and I can find blogs in the US that say it’s taxable in the US and if. And if you don’t pay tax, you’re gonna go to jail. And I can find blogs that say it’s tax free under the treaty. And if you. And anyone who does otherwise is an idiot. Like, what’s the.

Holly:
[00:25:16 – 00:25:41]
I think there’s different opinions that we’re happy we’re comfortable with this position and we file hundreds of tax returns with this position. I think some firms get nervous with the wording of the lump sum part of the treaty, which would prevent it, but we’re comfortable. If you look good further down, the IRS definition of a lump sum can be 100%. So that 25%. That’s why we’re comfortable taking it. So we’re happy to make that position.

Richard:
[00:25:41 – 00:27:10]
Let’s nerd out for a second. I don’t get much opportunity to do this. Let’s just nerd out. So we’re talking about, if I’m Right, this is 171 and 2 of the treaty. Right. And 17 2, which is what you think it’d be excluded under, says any lump sum. If it’s tax free in the uk, it’s tax free in the US Right. And that’s what you think. Oh, good, great. I can hang my hat on 17 2. But that wonderful thing that applies to all US treaties, a savings clause that basically says the US can disregard what it wants. So the US can apply the savings clause to 17 2. Am I right here? And then. And then disregard it. But there’s still 17:1 which says any pension or enumeration that’s paid from a UK pension is if it’s tax free in the uk. It’s tax free in the US and the savings clause doesn’t apply to that one. And arguably PCLS falls into that, into that category. Right. A lump sum payout from a US perspective is a full distribution, isn’t it? And PCLS is not a full distribution. PCLS is a partial distribution. It can even be paid as an income. There’s a school of thought that it’s taxable and there’s a school of thought that it’s tax free. Until it’s like settled in law or challenged in court, no one knows for certain. But the point is the quality firms that we work with are comfortable taking a position that is tax free under the treaty. But the important thing is here, you can’t just take that. You’ve got to do the reporting. You’ve got to claim a treaty exemption, you’ve got to say you’re taking its tax free under 17 or whatever it is with the treaty and you’ve got to put that in your tax return. Because if you don’t.

Holly:
[00:27:10 – 00:27:20]
Yeah, that would open up. Yeah. For you to report it. If you’ve made that claim, they can reject it. If you didn’t put it on there at all, just assume it’s tax free, then that’s when you don’t put on.

Richard:
[00:27:20 – 00:27:54]
Your, you don’t put on your return. Number one, if they pick it up, you know, the IRS being the irs, they’re going to take the position that, oh, are you hiding this from us? Are you doing something untoward? And you don’t want them coming at you with that. And number two, the statute of limitation never starts ticking. So if you take it tax free, you file it correctly, you take a treaty exemption, they’ve got three years to come back to you. And if they come back to you, you’ve done it properly and you, and you can choose to fight it or whatever, but if not, you’ve got, they’ve got three years. But if you don’t file it, they can come at you whenever and they can take the position you are hiding stuff from us. And that can have repercussions, additional penalties.

Holly:
[00:27:55 – 00:27:56]
Yeah, and you’re on the back foot, aren’t you?

Richard:
[00:27:56 – 00:27:57]
Straight away.

Holly:
[00:27:58 – 00:28:11]
If they’ve spotted you haven’t put $300,000, it’s going to be worth their time and costs to come after you. You could have used the treaty. That treaty claim doesn’t stand unless you’ve made it. So it’s worthwhile them arguing with you about it. So it’ just make that claim.

Richard:
[00:28:12 – 00:28:40]
So the message here Is guys, it you go online and you will, you’ll find varying, varying opinions which are argued vociferously, let’s say. But the point is here there is a position to take, but you got to do it properly, you got to do it professionally. And if you’re diying this, heaven forbid, or if you’re going to see Joe around the corner, local tax preparer, they, they don’t know about this. They don’t know about claiming, taking treaty exemptions. It’s just worth paying for.

Holly:
[00:28:40 – 00:28:54]
An expert, I think this is our bread and butter. Like, you know, most people moving to the US have a UK pension. So we take this position all the time. And I personally haven’t seen the IRS challenge it when it’s disclosed neatly like that.

Richard:
[00:28:54 – 00:29:02]
Good, good, good. States, different states and PCLs. So we’re taking a position that is tax free federally. What happens at the state level?

Holly:
[00:29:02 – 00:29:19]
Yes, we’re back to this problem with do states follow treaty provisions? So if you were New York resident, then yes, they would allow that 25% tax free lump sum. California, we’re back to adding it back into income, unfortunately. So that could be another 13% California.

Richard:
[00:29:19 – 00:29:22]
So they’ve hit you on the transfer into a SIPP in the first place.

Holly:
[00:29:22 – 00:29:35]
Well, if you’d have that basis, if you paid it on the transfer, then they’re not going to tax it again at 25% lump sum. But it might be. Maybe you did that transfer when you were living in Florida and then you moved to California, took the 25% lump sum.

Richard:
[00:29:35 – 00:29:47]
Or I’ve got a client who did it who’s already came to the US with SIPs, substantial SIPs, and now they’re in Connecticut and Connecticut applies this. So fun times, fun times. If you’re in California, bring your advisors.

Holly:
[00:29:47 – 00:29:49]
In before you do it, basically always.

Richard:
[00:29:50 – 00:29:58]
Okay, what about then? So you’re taking your PCLs, you’ve not paid tax. Or maybe you have if you’re in one of these difficult states. I want to start drawing an income from my sipp.

Holly:
[00:29:58 – 00:31:14]
So if it’s a sipp, it’s going to be invested in shares, throwing off dividends. Without the treaty, they would be taxable because it’s a trust, just on your return, as if that pension didn’t exist. So we might want to use the treaty again to exclude those each year depending on your circumstances. So then we’d get to the point eventually I want to distribute from the pension, how’s it going to be taxed? So again we’d need to use the US UK treaty because on paper there’s a UK pension, the UK will want to tax that and the US will want to tax that. But the treaty exists to prevent double taxation and then we go back to this sort of lump sum definition again. So if it’s not a lump sum distribution from a pension plan, then the treaty says your country of residence gets to tax it and not the other country. So for somebody living in the us it’s going to be taxable in the US and not the uk. You need to get your kind of paperwork in order to either prevent the HMRC taking tax from those pension distributions in the future. Ideally you do that ahead of time. If not, then you can file a non resident UK tax return and get it back. But it’s going to be an easy kind of have your, your thought will be, yeah, it’s a US basically US tax event going forwards.

Richard:
[00:31:14 – 00:32:27]
Right. So you’re taking drawdown and it, it’s going to be taxed in the U.S. basically you’re just going to add that income to your tax return and pay US income tax on it. Yeah, because it’s a UK Citus asset, the UK are going to try and tax that first of all. So you want to avoid this. So how you go about this, it’s not as simple as just telling your pension provider, oh, don’t tax this. You’ve got to apply for what’s called an anti tax code and a non taxpayer code. So we help our clients. Well I say we help, we can’t do very much. We redirect them how to do it to apply for this NT tax code ahead of time. And what happens there is a client fills out an hmrc, a dual HMRC IRS form, they sentence the irs, I think it was in Philadelphia, the IRS deal with it at some point in 6 to 12 months and then they forward it to HMRC. Then HMRC deal with it at some point within 6 to 12 months and then they upload a non taxpayer code to the PAYE system because people don’t realize. But your pension payments go through the PAYE system that used to get paid out in the UK and that process can take a year and in the meantime you’ve got no oversight over it. You submit that form and you just cross your fingers and hope it gets done in the meantime.

Holly:
[00:32:27 – 00:32:29]
Yeah, I think a year would be quite generous.

Richard:
[00:32:29 – 00:32:29]
Yeah.

Holly:
[00:32:29 – 00:32:31]
Seeing much big delays.

Richard:
[00:32:31 – 00:32:51]
Yeah, I can well imagine now 18 months. And you can’t do this too early because NT tax codes can expire. So you have to try and get this right and then if you don’t get this done in time and you’re taxed on when the money comes out of the SIP tax is applied at source in the uk, you still have to declare that gross amount in your U.S. tax return. You have to claim it back from the UK.

Holly:
[00:32:51 – 00:33:07]
Yeah, you could be adding 45% and 37% and in the short term you’d get that tax back from the uk. I think what we find can help speed up that process is if, if you can take a very small distribution from that UK pension.

Richard:
[00:33:07 – 00:33:07]
Yeah.

Holly:
[00:33:07 – 00:33:20]
There’s something underneath the personal allowance, so they shouldn’t be withholding tax. You know, just a couple of thousand pounds that kind of triggers HMRC to think about it. They give. Then you have a PAYE reference, which really helps speed up these forms.

Richard:
[00:33:20 – 00:33:30]
Still some tax though, get you get a lower tax rate on there. And the reason I’m bringing this up is because people think, oh, do you know what, even if I’m taxed in the uk, I’ll just offset it against my us. But you can’t do that.

Holly:
[00:33:30 – 00:33:31]
You can’t do that.

Richard:
[00:33:31 – 00:33:41]
You gotta. You’ve still got to declare it gross to the us, pay that tax and then get it back from the uk. And that could cause you some cash flow challenges. It’s just a headache that you could do without at best.

Holly:
[00:33:42 – 00:33:45]
Yeah, I did get that sorted out before, before you take distribution.

Richard:
[00:33:45 – 00:33:55]
But like everything, it’s just not as easy. It’s just not. It’s just not as easy as just saying, oh, guys, I’m in the us, don’t tax me. A whole process to go through used.

Holly:
[00:33:55 – 00:33:58]
To be like that, but unfortunately, yeah, used to be much more straightforward, but.

Richard:
[00:33:59 – 00:34:27]
Yeah, no longer no inheritance tax. So our kind of starting point for clients is once you start drawing down on your assets in retirement. We start with the UK stuff. We drain uk assets, including SIPs, for a variety of reasons, because the US stuff is cheaper, lower cost and oftentimes better investment options. We do it to simplify the tax returns. But what happens if I die with a substantial UK pension?

Holly:
[00:34:28 – 00:35:09]
So the current rules, that was free of inheritance tax for UK tax purposes for a pension, the current government has just, they’ve changed that. So from April 2007, 2027, I’m in the wrong decade. Pensions are going to fall into the scope of UK inheritance tax and that can be a shock. So if you’d moved to America, you may have got rid of your UK Citus assets and you’re not really thinking about UK inheritance tax. But this is going to give you an inheritance tax tail. And if we’re looking at a million pound sip, then there’s going to be inheritance tax exposure on that UK inheritance tax. Yes.

Richard:
[00:35:09 – 00:35:11]
Even though I’m in the US, I’ve been in the US for 20 years.

Holly:
[00:35:11 – 00:35:31]
It’s a UK situs asset of a UK pension. You may be able to, if you’re leaving it to your spouse, defer that. But it’s still, it’s a problem kind of sitting in the background. And we’re kind of waiting to hear more clarity, really, on how they’re going to assess this. Because, I mean, how that, how’s that inheritance tax going to be paid? Is it going to come out of the pension?

Richard:
[00:35:31 – 00:35:32]
Wouldn’t it be taxed again as well?

Holly:
[00:35:32 – 00:35:56]
Right, Yeah, I think we’re just waiting to hear more, but I think that would kind of make it more, even more important. You talk about draining down the UK assets just for your compliance and make things more efficient, but that would also doing that would help reduce that inheritance tax exposure because as you know, in the UK you have the 325,000 exemption, which is much smaller.

Richard:
[00:35:56 – 00:35:58]
It’s hilarious. Compared to what you have in the us.

Holly:
[00:35:58 – 00:36:18]
Yeah. And it would be, yeah. Also if you’re over 30 million in the US, that SIP would also be within the scope of US estate tax. You’d be able to take a credit for any UK inheritance tax. But yeah, I think that sometimes gets missed when people are thinking about the looking at that $13 million that, that sip could really kind of push you up towards.

Richard:
[00:36:18 – 00:37:30]
So drain the sip. So Donald Trump has drained the swamp. We have our new slogan is drain the sip. I hesitate to do this, but let’s try and summarize the three different stages. Right, so you arrived here, you haven’t done any pre planning. You’ve got several disparate old pension plans, employer, stakeholder, personal pension, whatever. You need to be thinking about Reporting, reporting on FBAR, reporting on 8938 and accounting for that growth every year and taking a treaty exemption. Okay, box ticked, second stage. You think, right, I’m going to sort this out now. I’m going to get this into a better investment vehicle. Change the currency, all that good stuff, get access to it. So you roll these into a sip. Okay, so first of all, you’ve got to claim a treaty exemption on 8833 for the role. You also need to pay attention to what state you’re in. And that might mean you don’t roll over now. It might mean that you do some planning. It might mean that you pay some tax now to pay less in the future. But you need to be aware of that going forward. Now you have a sip. So you still have the F Bar 3520. You have 3520A. And they’re quite intense forms. But that means, no, you don’t own how to 8938 because you’re doing the 3520.

Holly:
[00:37:30 – 00:37:49]
You don’t have to do the full reporting on the 8938, but there’s a little chat box that says, have you got 35? And also when you’re looking at the 8938, there’s different filing thresholds. Just because you haven’t reported the account in full because you’ve got that exclusion, you need to think about that when you’re totalling up your foreign assets to see if you need to fill that form.

Richard:
[00:37:49 – 00:37:49]
Okay.

Holly:
[00:37:49 – 00:37:58]
So it could be that’s your only UK or non US foreign account, but you still need to file it and have that little box ticked that says.

Richard:
[00:37:58 – 00:38:55]
So it’s like you got your sip. You’re definitely doing F bar. You definitely need 35, 20, and you’re probably still doing 89, 38 because you’ve got other accounts and stuff like that. Yeah. Okay, that’s great. And every year we’re investing it for you. It’s doing fabulously well. And every year that it goes up, you’re taking a treaty exemption on the 8833 for that growth. Then you take that 25% PCLS and you’re not in a state with any state issues. You’re in New York or Florida, but you still got to do an 8833 treaty exemption to claim that PCLS is tax free. And then you’re still doing all these annual forms. You’re about to start taking money out on an annual basis. Drawdown. We want to apply for an NT tax code in the UK that takes a year, 18 months. And then we can avoid any UK tax being withheld. In addition to doing all the reforms we mentioned before, you still need to do an 8833 if it’s growing. And you now need to be declaring that income gross on your U.S. tax return and paying UK income tax. U.S. income tax at your marginal rate.

Holly:
[00:38:55 – 00:38:58]
Yes, and. Well, try not to die with it.

Richard:
[00:38:58 – 00:39:05]
Try not to die with it. Cool. Blimey. Right? Yeah. Anyone. Anyone attempted to do all that on their own.

Holly:
[00:39:06 – 00:39:07]
Should we talk about Malta?

Richard:
[00:39:07 – 00:39:26]
Yes. Right. Okay. So we put a lid on UK friendly UK pensions. Right. That’s the friendly UK pensions. Now anyone who is listening to this may in the past have rolled their UK pensions into a Malta pension scheme. Qrops. Let’s just talk about that for a minute. What’s going on there?

Holly:
[00:39:26 – 00:39:32]
So the IRS have decided they do not like Maltese pension plans because some people were abusing the rules.

Richard:
[00:39:33 – 00:39:37]
Not UK pension people. Right. These are a different, these are Americans.

Holly:
[00:39:37 – 00:40:23]
So a different category of people abusing the rules. Which unfortunately has meant the IRS have really cracked down on people with Maltese pensions. And we’ve been talking throughout this, this conversation about the use of the US UK tax treaty which gives you kind of all sorts of protection from dry tax charges. The IRS have determined there used to be a Maltese US treaty which we could take similar provisions for the IRS as part of this crackdown a number of years ago. They’ve said the treaty doesn’t apply for Maltese pensions. So we mentioned all these helpful things like transfers in income as it’s going PCLS’s we can use the treaty for that no longer applies for people with Maltese pension plans. All of that will be taxable as you’re going along.

Richard:
[00:40:23 – 00:40:39]
Wait, so I had a. I’ve got UK pension. I rolled it into a Malta pension a curops years ago and I thought under the treaty I’m going to get all these benefits. I won’t be taxed until I take money out. I’ll get 25% tax free. All this good stuff. And that just got thrown out the window.

Holly:
[00:40:39 – 00:41:29]
Yeah. And where it can be particularly problematic, the transfer may have happened years ago. That’s okay. That’s in the past. Where it really catches people is the annual income within that cure ops. So they often hold non US mutual funds which are caught by the nasty passive foreign investment company rules. And we’re looking at it. When you sell One of these PFICs might be 50 up to 50% tax rate once you’ve added in all the penalties the treaty had that been in place, that just kind of covers that and you pay tax on eventual distribution but you can’t use that protection on annual income anymore. So say you rebalance the portfolio, you might have sold all of those funds and they’ve got big gains that can be a massive kind of dry tax charge on your U.S. tax return and all the additional reporting that comes with those PFICs. So not great news.

Richard:
[00:41:30 – 00:41:30]
Not great news.

Holly:
[00:41:30 – 00:41:37]
And the IRS, yeah they’re not backing down on this either. This was announced a number of years ago. They’re not backing down and that’s going to continue.

Richard:
[00:41:37 – 00:42:21]
Well, that’s right. So it was announced what, in December 21st was when they came out and said, okay, you did. Basically the treaty doesn’t apply. 2023, they proposed making a listed transaction. So they proposed making it, formally designating it as like a tax abusive transaction. And anyone participating in such a plan had to self report, basically hand them a smoking gun. Right. And in that proposed ruling, they specifically chose to include, you know, qrops that resulted from UK pensions they could have excluded at that point, but they chose not to. So the last we heard from the irs, Einstein, it was very clearly, you’re caught in this net.

Holly:
[00:42:21 – 00:42:44]
Yeah. Which is, yeah, very bad news for some people. So it’s. Yeah. Working out what you want to do going forward. There might be some kind of catch up. You know, this, this pulls other old year returns in as well. You may have used the treaty in those prior years. I think we’d be looking at least three years. But you’re going to have to amend those tax returns and it’s going to. Yeah. There could be penalties if.

Richard:
[00:42:44 – 00:43:07]
What are the options? So. So let’s say I’m in that boat, Holly. I’ve got this uk. I wasn’t trying to do anything funny. I just had my UK pensions. I wanted to put them into something where I could get them out of the UK tax net, not the US UK tax net. Get them to dollars, invest them. Not trying to do anything funny. I’ve now found I got the rug pulled from under me because someone else, incredibly wealthy was trying to do some very dodgy tax planning.

Holly:
[00:43:07 – 00:43:24]
Yeah. So what could we do? Could we, if you’re old enough, could you withdraw from that pension? That could be an option. Just close it and bring the money out of Malta. That can take quite a considerable time to do that. You might consider moving it back into a UK sip. Definitely. Just speak to your advisor.

Richard:
[00:43:24 – 00:43:46]
Yeah, yeah. But so, but the thing if you take it all out, though, mindsetting it is if this proves to be retroactive, which it currently is, basically because it just said, oh, you’ve been relying on the treaty for seven years. Well, we’re ripping that up. You can take it all out. But if it is retroactive, then that doesn’t. And you’re just living with that risk hanging over you the whole time for your prior returns.

Holly:
[00:43:46 – 00:43:55]
Yeah. So you need to catch up with those filings. So amending those three years of returns to remove that treaty claim. Oh, so yeah, so you need to do that first.

Richard:
[00:43:55 – 00:44:21]
So this is something through, we’ve talked about it a few times here. Streamlines is an option. Right. So you realize through no fault of your own, the rules have just changed on you and you’re like, okay, gov, sorry. You can use a streamlined process, which we’ve referred to a few times and I’ve done a podcast with Chris McLemore on it, to essentially go back and amend a limited number of returns, pay some tax now, come into compliance proactively, and then exit the qrops.

Holly:
[00:44:21 – 00:44:45]
But just be careful when you’re making that exit. I mentioned the treaty no longer protects some of the underlying income and gains. It might be, maybe, maybe there haven’t been any disposals with capital gains in the last three years. But if you’re going to liquidate that pension, then there’s to be going, there’s going to likely be a disposal of them. It’s pretty difficult to get things out in specie. So then there might be, you might, I know, hold 5pfix in there.

Richard:
[00:44:45 – 00:46:26]
But you know what though, Holly, if it’s pfix, you best off just, you know, you don’t want to get them in specie, just ditch. By holding Pfix, you’re just making the problem worse because of the penalties and the interest we applied. So what we’ve urged people to do is just get into compliance. Like the rules have changed on you, it’s not your fault, it’s brutal. But just don’t have this hanging over you. Go through a process, streamline, get into compliance, get out of the pfix, pay the tax, liberate that money, but do so knowing that you’re in compliance and that’s behind you. And we, that’s, that’s been a path we have advocated when we have encountered this for clients. Because it’s, it’s awful. Really. It’s been a, it’s horrible. Yeah. And because mega, mega wealthy Americans, I mean mega wealthy 100 odd millionaires were manipulating the treaty to do something that was so obvious. Even if, even if it transpires technically within the letter of the law, it was allowable. It was so obviously tax abusive, in my opinion. You know, it was like, you know, maybe, maybe you found a loophole. But like this is so obviously tax abusive, what they were doing. Okay, right, well, listen, this has been, this has been a technical one. So, but I hope that any Brits or anyone who’s collected UK pensions either because they’re a Brit living in America now or they worked in the UK for a period of time, has a better understanding of how to navigate these UK pensions and SIPs through the US tax reporting space and how it’s just, you know, like everything cross border it’s. And everything US connected cross border, it’s got its challenges and its idiosyncrasies and they can be expensive mistakes as well.

Holly:
[00:46:26 – 00:46:28]
And also good, good planning options as well.

Richard:
[00:46:28 – 00:46:59]
Good planning options. Thank you. Yeah, okay, you’re right, you’re right, let’s finish on that one. Good planning options folks, with the right advisory team around you. I’ve said it once, I’ll say it a million times. If you’re an expat of means in America and you don’t have a good cross border team around you, financial, tax and estate, that is a way to avoid the landmines and also take advantage of the opportunities. And you might save in fees year on year not doing it. But I guarantee it will cost you more in the long run, either through penalties or through missed opportunities. Okay, Holly, where can people find you?

Holly:
[00:46:59 – 00:47:11]
I am at Buzzacott so you could look me up on our website or send me an email. I’m sure Richard, you’ll put that as part of the podcast. But yeah, just feel to reach out. I’m happy to sound bored of your.

Richard:
[00:47:11 – 00:47:25]
Problems and then any of my problems or just, just your SIP problems. Okay, well, we’re going for lunch now, so I’ll unburden myself on you over lunch. Great. Well, Holly, thanks for coming on. We’re the Brits in America.

Holly:
[00:47:25 – 00:47:26]
Yeah, thanks for having me, Richard.

Richard:
[00:47:26 – 00:48:30]
Cheers. All right, let’s go for a pint. Alright folks, that’s another episode of we’re the Brits in America 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 and immigrants thrive in America, I’d ask you to subscribe to the POD wherever you listen and also consider consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it, I. E. Your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based lifestyle 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 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 time.