UK IHT on US IRAs and ROTH IRAs

It may all change in next month’s budget.

https://ifamagazine.com/autumn-budget-2024-pension-sector-runners-and-riders/

That income tax break on money left by someone who dies before 75 is bizarre to me. I mean...why? Excluding UK DC pensions from  the estate for UK IHT calculations is also strange to me. But we have to work with what we've got. I should have most of my TIRA's converted to my ROTH before I have to do RMDs. I do some part time work and have been making Individual 401k contributions for the past few years and I think it would have been better to do a ROTH 401k or ROTH conversions...anyway it's a good problem to have I suppose. My main goal is to get as much of my money into the ROTH to make it easy for my beneficiaries as having to take the inherited money from a TIR within 10 years would put them in the highest UK tax bracket. With the ROTH they can take the lot out all at once with no US or UK tax and fund ISAs, general investment accounts, put the max possible into UK DC pensions and pay off mortgages etc.

While researching something else, I was reminded of @Swiss_Danny's post re IRAs and IHT.  Unless I've misunderstood, in his consultation with Blick Rothenberg he established that an IRA is not included in a person's estate for IHT purposes.  Have you read that thread?

While researching something else, I was reminded of @Swiss_Danny's post re IRAs and IHT.  Unless I've misunderstood, in his consultation with Blick Rothenberg he established that an IRA is not included in a person's estate for IHT purposes.  Have you read that thread?

Here is that thread
https://talk.uk-yankee.com/index.php?topic=101357.0

I’m assuming that IRAs are not excluded in the calculation of IHT.

Here is that thread
https://talk.uk-yankee.com/index.php?topic=101357.0

I’m assuming that IRAs are not excluded in the calculation of IHT.

I have no idea what the correct answer is but to be clear - you believe that IRAs are included in an estate for IHT purposes?  Did you form that opinion form your own research or did you consult an estate tax pro?

I have no idea what the correct answer is but to be clear - you believe that IRAs are included in an estate for IHT purposes?  Did you form that opinion form your own research or did you consult an estate tax pro?

Just my own research. I have not found a definitive text on the issue.

I have no idea what the correct answer is but to be clear - you believe that IRAs are included in an estate for IHT purposes?  Did you form that opinion form your own research or did you consult an estate tax pro?

Domicile and tax residency are going to be important factors in whether or not your US assets are included in your estate for UK IHT. I think the bottom line on this is that the tax treaty does not address inheritance tax so HMRC will look at your IRAs and just treat them as a foreign trust and tax them according to their rules. You will also have to apply the Gift and Estate Tax Treaty to see who has precedence. I would start from the assumption that if you are UK domiciled you will pay UK IHT on your IRAs and if this is a problem then seek some professional advice.

Domicile and tax residency are going to be important factors in whether or not your US assets are included in your estate for UK IHT. I think the bottom line on this is that the tax treaty does not address inheritance tax so HMRC will look at your IRAs and just treat them as a foreign trust and tax them according to their rules. I would start from the assumption that if you are UK domiciled you will pay UK IHT on your IRAs and if this is a problem then seek some professional advice.

Agree with all of that.  You may know this already so forgive me, but the crux of the matter appears to be whether your beneficiaries are simply designated as an expression of wish, or not.  That's how UK pensions stay out of your estate for IHT because they generally have an expression of wish and the trustee has the final say.  So, the question becomes whether the designation for an IRA is an expression of wish or not.  As far as I can see it's not an expression of wish.  Is that right?

Agree with all of that.  You may know this already so forgive me, but the crux of the matter appears to be whether your beneficiaries are simply designated as an expression of wish, or not.  That's how UK pensions stay out of your estate for IHT because they generally have an expression of wish and the trustee has the final say.  So, the question becomes whether the designation for an IRA is an expression of wish or not.  As far as I can see it's not an expression of wish.  Is that right?

I've seen that as a theory. I've written to HMRC's inheritance tax office to see if they can clarify the situation so maybe I'll have some sort of statement from them in a few months. If someone is in the UK they could call and ask as well. I'm not going to do it from the USA though, $2 on postage is as much as I'm prepared to spend.

I'm guessing that with today's announcement by Rachel Thieves regarding pensions and IHT, the question is now moot i.e. IRAs and such will form part of your estate for IHT purposes, just like UK pensions.

I'm guessing that with today's announcement by Rachel Thieves regarding pensions and IHT, the question is now moot i.e. IRAs and such will form part of your estate for IHT purposes, just like UK pensions.

I agree.

Although I should qualify - everything, including pensions, still passes to your spouse IHT free.  There seems to be a bit of confusion over this.

So Durhamlad, what exactly was the "lump sum/periodic payment" reasoning behind being able to do UK tax free IRA to ROTH conversions. It looks like this might become important for me. I'm going to be reaching out to our tax "friends" Nicki and David to see if either can come up with a reasonable tax plan, but UK IHT is the biggest issue with any move back to the UK for me.

So Durhamlad, what exactly was the "lump sum/periodic payment" reasoning behind being able to do UK tax free IRA to ROTH conversions. It looks like this might become important for me. I'm going to be reaching out to our tax "friends" Nicki and David to see if either can come up with a reasonable tax plan, but UK IHT is the biggest issue with any move back to the UK for me.

My last Roth conversion was 2020 and in section 19 "Any other information" of the HMRC return is the paragraph quoted below.  We each alternated years doing Roth conversions.

My wife and I returned to the UK on 8 May 2016, having lived in the USA since 1987. In
this return, the 2020 calendar year has been regarded as co-terminus with the 2020/2021
UK tax year since all income and capital gains will be declared year on year and this
method makes the foreign tax credit computation more accurate with UK taxes credited on
the US Return in respect of doubly taxed income only.
During the 2020 calendar year, I did a Roth Conversion in respect of my Vanguard Pension
Fund of $xx,xxx and, since this is a lump sum from a US plan, it is subject to US tax only
and exempt from UK tax and has therefore not been included in this return.

Is the “lump sum” identification justified because it was a single payment in the year or because it was a single payment every other year.

Is the “lump sum” identification justified because it was a single payment in the year or because it was a single payment every other year.

I would think you can call it a lump sum if it is once a year. We had the advantage of both having IRAs so could do a conversion every other year.