25% Tax free income from SIPPS - apportion between basis and profit

How about this.

1. I have been advised that if I take periodic payments from my SIPP I can claim 25% as tax free as it would be tax free in the UK (I am US resident now and NT tax code in UK so no UK tax). No lump sum.

2. I have been advised that because I did not exclude the contributions to the SIPP from my US income (I didn't 8833 the contributions), I have a basis in the SIPP and only pay tax on the profits on the SIPP. So let's say my contributions to the SIPP were 60K and it's now worth 100K - I pay tax on the 40K profit.

3. Now here's the kicker - on which I could use some advice and have someone check my logic. I can't see anything in the treaty which indicates how to apportion the withdrawals between income and capital, nor how to use the 25% tax free element. What's to stop me using the entire 25% tax free element for the profit (which is taxable) withdrawn from the SIPP? So in the case of the aforementioned 100K SIPP, let's say it's withdrawn in 10 equal chunks of 10K each. I know the first 6K of this is tax free as it's the basis, and 4K is taxable. But 2.5K of all this (25%) is tax free according to the 25% rule. Can I apply all that 2.5K tax free element to the 4K taxable element? Or how about taking 2 withdrawals a month - one for 6K (tax free - withdrawing some capital) and one for 4K (withdrawing profit) and apply my 25% against this 4K? Ergo I pay tax on 1.5K / month rather than 7.5K /month?

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In respect of point (2), that's not quite how basis works using the general rule in IRC Section 72. You'd need to figure how the exclusion ratio.  Hopefully you have done this... I have no view on your position on the 25% that has not been previously discussed.

RE point 2 - I haven't done the basis calculation yet, this is the first year I have taken any income from the fund. I'm sure my accountant will calculate that based on my contributions etc.

Thanks

RE point 2 - I haven't done the basis calculation yet, this is the first year I have taken any income from the fund. I'm sure my accountant will calculate that based on my contributions etc.

Thanks

In this post you mentioned you have a written opinion from a "tax attorney" http://talk.uk-yankee.com/index.php?topic=91810.msg1200552#msg1200552

I note that in addition you have an accountant who will actually prepare the tax returns.  The calculation of the exclusion ratio is frequently complex and takes many, many hours to calculate. You may want to make certain this is something your accountant has handled previously or if he wants you to pay an actuary to calculate for you.   

Your tax attorney is the person to answer the questions you have asked, as his opinion in writing will reduce penalties being charged by the IRS should they ever successfully challenge your position. 

Hi Again, and thanks for that. The trouble is the tax attorney is very expensive so I tend to research and ask here first. Attorney has offered to calculate the exclusion for me but if accountant can also do it it will save a lot of $.

What I think is new to me is the idea of using the 25% tax free element of (periodic) distributions against only the profit portions of the withdrawals, and I don;t see anything in the treaty RE this. So if in a series of periodic payments I take out 100K - 25K of that is tax free. If we determine the basis in my SIPP - or the exclusion ratio as you call it (which I'm sure is more accurate)  is say 60K - then I am not paying tax on that 60K regardless. So - I would have 40K taxable distributions but can I apply the 25% tax free part (per the treaty) just to the   profit part of the distribution? I'm making up the 60K / 40K values - until the accountant has done his calculations I won't know the taxable / non taxable ratios.

Furthermore, I haven't seen this advocated elsewhere but it seems like a great tax-saving tip to me, no?

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