Who do you pay? IRS or HMRC?

Say you are a US citizen resident in the UK and take an IRA distribution on January 1st of $10k. Your IRA provider will withhold 10% tax and $9k gets credited to your bank account.

Now April 5th comes around and you have to do your UK self assessment.

Do you pay UK tax on 90% of the $10k distribution and take a FTC for the 10% withheld for US tax? If the UK tax rate is 20%, you would pay 10% to HMRC. If the US tax rate is 15%, when you have to pay your US taxes, you've already paid 10% to the IRS and you take a credit for 5% of the 10% you paid to HMRC, to cover the US tax due.

or

Do you pay the whole 20% UK tax on 90% of the $10k distribution and when US tax time comes around you take a 15% FTC and get a the 10% withholding tax refunded?

Don't most tax treaties provide that private pensions and annuities are exempt
from withholding and tax? Can you file with the IRA custodian to have no tax withheld? Could this be another method?

I am WAY out of my depth on this one, but I seem to remember you first need to decide whether you want to take the amount as a lump sum or a periodic payment. I thought it made a difference. You do not report lump sum withdrawls on the UK return(?), but strict time periods between withdrawls are involved if I remember correctly.

If it's periodic, I would keep it simple. It is reported on the UK return (again if I remember correctly), and 90% is taxed by the UK. I'm sure there must be a much more clever way to do it, but I would pay the UK tax first and then claim FTC after declaring it on the US return, and wait for the refund. If you've claimed the entire $10,000 to the UK, then the refund may not have to be declared to the UK later (but I'm very unsure about this). While you're waiting, you can feel good about your benevolent tax free loan to help pay down the US deficit.

If you wish to go the first route, then the use of a pro tax advisor may be the best bet. Doing it the first way could become very complicated for future (or amended) returns. (And I do understand the difference in tax rates. Is it worth it for $10,000?)

Again, I'm really guessing on this one.

For the first route, if you declare the US witholding, I'm not sure you're only taxed on 90% of the amount by HMRC. The way the form is laid out, it may be 100% minus the FTC(?). Worth checking the instructions.

Don't most tax treaties provide that private pensions and annuities are exempt
from withholding and tax? Can you file with the IRA custodian to have no tax withheld? Could this be another method?

Yes they do, but unfortunately the savings clause swoops in and nullifies the treaty Article that deals with income payments from pension plans for US citizens, so they are taxable by the US. US citizens must have a minimum of 10% tax withheld from IRA distributions, the only people that get to claim 0% withholding are non-US persons.

If it's periodic, I would keep it simple. It is reported on the UK return (again if I remember correctly), and 90% is taxed by the UK. I'm sure there must be a much more clever way to do it, but I would pay the UK tax first and then claim FTC after declaring it on the US return, and wait for the refund. If you've claimed the entire $10,000 to the UK, then the refund may not have to be declared to the UK later (but I'm very unsure about this). While you're waiting, you can feel good about your benevolent tax free loan to help pay down the US deficit.

If I do the second way I end up paying 30% tax initially and have to use the UK tax paid to cover the US tax and then claim back the 10% withholding as a refund. As you point out I end up giving the US a 10% loan for a year.

I don't see the first way as much more complicated and it is certainly allowed.

Here is a nice ruling for US/Swiss taxation of IRA distributions and is instructive
and I now realize that a thorough understanding of Article 24 is required. More bedtime reading

http://hodgen.com/ira-distribution-to-u-s-citizen-living-in-switzerland-which-country-taxes-it/

FYI there's a great example on page 104 of the Technical Explanation of Article 24 of how to calculate the tax due in the UK and the US from US dividend income paid to a US citizen resident in the UK. I assume the method is equally applicable for IRA payments with the appropriate tax rates.

The method is close to the first approach I suggested, but there's a bit of calculation to get the US tax due correct.

http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

For the US: The US will hold the 30% for at least 13/14 months (if you would do the distribution on 1 January of year 13). That does not change, no matter which method you use. The US return you do in year 13 is for income in year 12 (and the distribution wasn't made until year 13). You cannot claim the 10% excess witholding back until year 14, when you do your year 13 return.  

For the UK: Remember, the UK does not demand immediate payment of tax due like the US. The UK tax year may end on 5 April (year 12/13), but you have until 31 Oct. of year 13 to file a paper return, and 31 Jan. of year 14 for an on-line return.

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/SelfAssessmentYourTaxReturn/Taxreturndeadlinescheckspenaltiesandappeals/DG_10014904

For the US: The US will hold the 30% for at least 13/14 months (if you would do the distribution on 1 January of year 13). That does not change, no matter which method you use. The US return you do in year 13 is for income in year 12 (and the distribution wasn't made until year 13). You cannot claim the 10% excess witholding back until year 14, when you do your year 13 return.  

For an IRA the US will only withhold 10%, so I don't know where you get the 30% number from. If I take a distribution on 1/1/13 I'd do the UK self assessment and claim the 10% US tax as a credit. Assuming I pay 20% UK tax the 10% US tax credit would mean I pay 10% to HMRC on or about 4/5/13. When I do my US taxes early in 2014, and assuming I'm paying 15% US tax, I can take a 5% tax credit of the 10% I paid to the UK and adding that to the 10% US withholding I have no US tax due.

The bottom line is that I pay the US 10% withholding tax and the UK 10%. The total tax bill is 20% which is the higher of the two tax rates (UK 20%, US 15%). This is exactly what the treaty sets out to do and I have not been doubly taxed. The proportion of tax that goes to each country will depend on the initial withholding and relative tax rates.

The one positive (?) concerning US taxation of USCs in the UK is the ability you occasionally have to accomplish an end with a choice of different means. It comes down to which means are you comfortable with, and different folks may chose different means. You've done well in sorting out what for you is the optimal approach. Go for it.

For an IRA the US will only withhold 10%, so I don't know where you get the 30% number from.

Looking back, neither do I. I've always made it clear I know nothing about IRAs.  

"4/5/13" I'm not sure if this is a US date, or a UK date. For self assesment, you can complete and send in your return in July/August if you wish. HMRC send you a computation of your taxes in September/October, followed by a demand a month or two later with a final payment date of 31 January of the following year. When you receive the demand, you can pay the tax due in December. It would include any tax due for the years 12/13.

"4/5/13" I'm not sure if this is a US date, or a UK date. For self assesment, you can complete and send in your return in July/August if you wish. HMRC send you a computation of your taxes in September/October, followed by a demand a month or two later with a final payment date of 31 January of the following year. When you receive the demand, you can pay the tax due in December. It would include any tax due for the years 12/13.

UK tax year runs from April 6th to April 5th of the next year.

The approach I outlined is the one given as an example in the treaty of how to deal with double taxation. I like it because I'm not "over paying" and having to reclaim back excess tax.

To anyone who is interested,

I run a wealth management firm that specialises in helping US citizens living in the UK from a wealth management perspective.  We spun out of Citi Private Bank a few years ago with the aim to help US citizens living in the UK.  Since 2008 US persons living in the UK for longer than 7 years should avoid US mutual funds and ETFs that do not have reporting status. They should also avoid non-US mutual funds and ETFs as they are mostly considered PFICs.

US investors should look at US mutual funds with reporting status and that is something that we at MASECO realised in October 07 when Alistair Darling, the then Chancellor, stated that he would introduce a tax on the non- domiciles. 

You can review our website at newcomer link: http://www.masecopw.com [nonactive] and get in touch if you have any questions.

James Sellon

To anyone who is interested,

I run a wealth management firm that specialises in helping US citizens living in the UK from a wealth management perspective.  We spun out of Citi Private Bank a few years ago with the aim to help US citizens living in the UK.  Since 2008 US persons living in the UK for longer than 7 years should avoid US mutual funds and ETFs that do not have reporting status. They should also avoid non-US mutual funds and ETFs as they are mostly considered PFICs.

US investors should look at US mutual funds with reporting status and that is something that we at MASECO realised in October 07 when Alistair Darling, the then Chancellor, stated that he would introduce a tax on the non- domiciles.  

You can review our website at www.masecopw.com and get in touch if you have any questions.

James Sellon

Good advice!

FYI practically all US based Vanguard EFTs are UK reporting funds and a good way for US citizens to invest outside of employer sponsored retirement plans, UK based funds should be avoided because of PFIC. It is sometimes difficult for a US citizen to open an account with a US broker if they live outside the US so it's a good idea to open one before you leave the US. I like Vanguard because they are very inexpensive, have an excellent range of EFTs and provide great service.

Here is a list of UK reporting funds that is updated each month. Make sure you choose ones that are US based.....if they have a CUSIP number they are ok.

http://www.hmrc.gov.uk/collective/rep-funds.xls

We are American citizens, with income from various investments (bond, stocks, ETFs, mutual funds, rental). We are considering moving to London for 1-2 years so that our kid can attend middle school. Assuming we do not have any income in the UK, are we going to be liable for any taxes and do we have to file in the UK ? Of course, we will have to continue filling and paying federal taxes to the US.......
thanks

We are American citizens, with income from various investments (bond, stocks, ETFs, mutual funds, rental). We are considering moving to London for 1-2 years so that our kid can attend middle school. Assuming we do not have any income in the UK, are we going to be liable for any taxes and do we have to file in the UK ? Of course, we will have to continue filling and paying federal taxes to the US.......
thanks

You will be liable for UK tax on any UK source income......but if you are only going to be in the UK for 2 years and your intent is to leave the UK you may be able to be taxed on a remittance basis so that none of your UK assets will be liable to UK tax unless you bring them into the UK.