UK Inheritance Tax treatement US Rollover IRA

Must admit, you lost me there with the "in trust" comment.

Im not a tax expert, but UK pensions are structured as discretionary trusts which are not controlled by the person so the assets are not part of the estate. The person can nominate beneficiaries but paying out to those is at the sole discretion of the trustees of the pension. Obviously they normally respect these wishes.

Im not a tax expert, but UK pensions are structured as discretionary trusts which are not controlled by the person so the assets are not part of the estate. The person can nominate beneficiaries but paying out to those is at the sole discretion of the trustees of the pension. Obviously they normally respect these wishes.

OK thanks.  So is this correct: the only issue is when the beneficiary (regardless of how an IRA is treated) is not a spouse.  Because when everything is left to a spouse there are no IHT implications at all.  That's true for all assets, yes?

I and my wife each have a Roth IRA and have recently named the beneficiaries as our 2 children. My wife and I are now at a stage where we have pension income coming in that either of us can live comfortably without both Roths.

So, when one of us dies and the Roth goes to the children, with the rest of the assets going to the surviving spouse, how is the Roth treated by HMRC? Both children have their own accounts, and Roth IRAs at the the same US brokerage as ourselves so the money would not leave the USA immediately and would exist as inherited Roths that the children have to withdraw over 10 years as per the rules of inherited IRAs.

Or might HMRC consider that despite the beneficiary designations that the surviving spouse actually inherited the Roths so they would be considered as gifts and the 7 year clock would start ticking?

Tricky stuff.

Actually inheriting the IRA is not taxable for the recipient is for sure. The distributions out of the legacy IRAs that ensue will likely be taxable as income for UK or US residents.  Then there is the whole question if the US institution will actually open a legacy IRA for non residents.

We need to be precise with language here: "Is the IRA part of the UK estate for IHT purposes if it has been left to nominated [non resident] beneficiaries?".  The DTA is reasonably clear, but the key issue seems to be whether the IRA can be considered to be "in trust".

I have an intial call with BR on Thursday and will report back. My fathers own UK tax advisor has also struggled thus far to find correspondent firms who are able to advise. It's clearly quite a niche topic.

How was your call with BR?  Did you learn anything?

How was your call with BR?  Did you learn anything?

I spoke to Jim Stidham a partner and a colleague who took notes. It was an excellent conversation that I would describe as an initial free consultation, rather than an onboarding. I genuinely had the sense they were talking from practical experience rather than just reading and interpreting the DTA.

He did confirm emphatically that the IRA Rollover account is defined in the notes to the UK US DTA as a pension scheme and would pass directly to the named direct descedent beneficiaries and not be part of his UK estate for IHT. He also said Schwab were in his experience pretty good at opening the Inherited IRAs including for non-residents.  We also discussed how the drawdowns are taxed (in the UK if regular distributions), how the social security is declared etc and he confirmed this all sounded correct.

We agreed that at this stage there wasnt a need for them to do any work but we'd see what the Autumn budget brings as Labour rumoured to be looking at changes to both CGT, IHT and pensions taxation.

I subsequently looked up the notes to the DTA,  see page 14 of https://home.treasury.gov/system/files/131/Treaty-UK-Protocol-TE-7-22-2002.pdf [nofollow]

Excellent summary, thanks so much for taking the time to give us this feedback.

Excellent @Swiss_Danny.  I love a bit of free advice, me!  I'm hoping to get some myself this week and I'll be sure to report back, hopefully to confirm what you've been told.

Only thing I didn't understand was your comment re social security?  Did you mean US Retirement Benefit?

Only thing I didn't understand was your comment re social security?  Did you mean US Retirement Benefit?

Yes his US state pension amount.

Yes his US state pension amount.

Ah OK.  I think that's one of the easier questions, no?  Declare in the UK, yes?  I'm assuming he's UK resident.

Strangely, not all DTA's are like this.  I know for a fact that a UK citizen/resident ( for example, a friend of mine) receiving state pension from Germany declares it in Germany - despite HMRC initially telling him he should declare it in the UK!  You couldn't make it up.

Strangely, not all DTA's are like this.  I know for a fact that a UK citizen/resident ( for example, a friend of mine) receiving state pension from Germany declares it in Germany - despite HMRC initially telling him he should declare it in the UK!  You couldn't make it up.

Interesting as he has German, French and Swiss state pensions too, but we just declare all in the UK and none of the countries withhold anything. For the marginal difference in taxes, the bother would be filling out even more returns...

Interesting as he has German, French and Swiss state pensions too, but we just declare all in the UK and none of the countries withhold anything. For the marginal difference in taxes, the bother would be filling out even more returns...

I don't know the ins and outs of my friend's case, but he was definitely contacted by the German tax authorities and it sent him into a right flap.  He only worked in Germany for a couple of years so the pension won't be substantial and it may be that he owed/owes no tax in Germany.  It's just an example of what a nightmare these situations can be.

It's just an example of what a nightmare these situations can be.

Pensions are indeed very complicated if you have led an international life!