IRA and first-time buyer question

Would the exemption from additional tax on a distribution of up to $10,000 toward a first home apply if the first home was outside the US?

I can't find anything specifically saying that it doesn't apply, but I suppose the intent is to encourage people to contribute to the US enconomy by purchasing homes in the US ...?

I would also be concerned that this moght be taxable in the UK.  Lump sum distributions of an entire plan are only taxed in the US under the US/UK tax treaty if a claim is made on a UK tax return.

I can't think the tax treaty offers any other protection from UK tax so you may end up with an unexpected tax headache...

1)  Yup, no requirement that the first home be in the US. 

2)  As a lump sum distribution, it's UK tax-free - but you do have to make the treaty claim on your UK return.

This is where we disagree; it is not a lump-sum distribution because the tax treaty description of a lump-sum was designed only in relation to 100% of plan distributions being treated as lump-sums.

If it was a lump-sum then UK domestic law would frequently exempt such a payment from UK tax so you wouldn't need to use the treaty at all.

The short answer although we disagree is that is complex so you'd really need to get to grips with understanding UK domestic law on IRAs plus the double tax treaty to decide how much to report in the UK ...

Sadly these are extremely complicated areas which is why we don't quite agree on this...

Guya,

The definition of lump sum is different under domestic US law from the definition under domestic UK law.  This can be used to a taxpayer's advantage.  I'd be happy to share the results of my research on this topic offline.  You'd have to PM me...

SweetPeach,

It's nearly impossible to provide a conservative position on this topic due to the differing definitions.  You might be well-considered to take professional advice in this case, otherwise you are taking a certain amount of risk without any one to back you up.  Accountants have professional indemnity insurance which can protect you to a certain extent from the results of taking a less-than-conservative position in a grey area.  Alternatively, you could consider using another source of funds. 

Thanks Guya and Lizzit.

I was purposely limiting my original question to the US tax rules. I realise I need advice regarding the UK tax implications.