SIPP Taxation for US residents is something we are frequently asked about, so it felt like a topic we should cover in our blog.
Any and every time tax is mentioned I have to lead with the disclaimer, in flashing neon, that I am not a tax adviser. My knowledge of taxation matters is informal and incidental to what I do and you cannot and must not rely on what I say when it comes to tax matters.
We strongly urge all British expatriates to seek tax professional advice, but more specifically we urge them to seek out suitably qualified and experienced CPAs with the requisite cross-border expertise. We know several and are happy to make introductions.
About SIPP Taxation for US Residents
First things first, your SIPP needs reporting to the IRS and Treasury Dept long before you start taking funds out of it. This doesn’t mean any tax is due, but you must report your non-US assets (the repercussions of not doing can be severe).
When considering the tax treatment of UK Pensions (including SIPPs) in the US we cannot refer to specific US legislation. That is because there is no specific US legislation dealing with UK pensions because, well, they are British.
So instead, one must refer to the Double Taxation Agreement (DTA) between the UK and US. It is important to remember why DTAs exist in the first place. One reason is so that individuals moving between the counties are not penalised or do not lose significant benefits simply because they migrated.
PCLS / Tax Free Cash
UK Pensions (including SIPPs) benefit in the UK from a portion being tax exempt – 25% (subject to the available Lifetime Allowance, see later section). Historically, this 25% was taken as a lump sum (Pension Commencement Lump Sum) but alternatively it can actually be applied to 25% of every withdrawal.
Whether the tax free status of the 25% is preserved for US taxpayers is dependent on the application of the UK:US Double Taxation Agreement and there are differing opinions among tax professionals (and it can be different still at the state level). We don’t want to stray into tax advice, so if this applies to you we strongly urge you to consult a suitably experienced CPA (we can introduce you to a cross-border CPA if needs be).
Any other withdrawal(s) over and above the 25% tax free distribution are subject to income tax. This is whether you take the withdrawal as an ongoing regular income or as a single lump sum withdrawal.
These payments can usually be paid out to you gross, but you will usually need an NT tax code to avoid emergency tax withholding in the UK.
Withdrawals must be declared to the IRS and tax will be due at your marginal rate of income tax, just as if it was coming out of an IRA.
You should not be double taxed. Again, this is the whole point of the DTA. If you are emergency taxed in the UK, you should be able to offset that against any taxes owed on your SIPP income in the US (although you may be required to file a UK tax return in addition to your US return). As we understand it, if the US is taxing you as a US resident, under the terms of the DTA, the UK cedes the taxation rights to the US (although, as previously mentioned, you may need an NT tax code to avoid UK Emergency Tax).
The Lifetime Allowance (LTA) complicates matters and is outside the scope of this informal article on SIPP taxation. The UK imposes a maximum amount that members can have in pension savings before they apply an additional 25% tax that is applied at source in the UK upon withdrawal of funds over and above the LTA (1,055,000 GBP in 2019/20 and increasing with inflation).
If you have more than £1.055m in UK Pension savings, or you think you may one day, then the LTA is something you should be aware of. There are also some additional protections that are available that secure your personal LTA at a higher amount. Your scheme may have applied for one on your behalf or you can apply for them on your own initiative (e.g. Fixed Protection 2016) at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.
Please remember we are NOT tax advisers and, if this applies to you, you should be speaking with a cross-border CPA. We can connect you to one if you would like us to.
Go back to – What is a SIPP and How Does it Work?
Plan First Wealth is a registered investment adviser. 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. Past performance is not indicative of future performance.