How does HMRC define a lump sum?

So as we all know pension taxation under the treaty depends on whether the payment is ‘periodic’ or ‘lump sum’.  The question I have is how is lump sum defined? Clearly, it would seem to me, if you take the entire pension amount that’s lump sum, and if you take a payment every month or every quarter that’s ‘periodic’, but what about all the withdrawals that don’t meet either of these criteria?

How long is a piece of string? I’m sure there will be much debate.

I never did more than 1 large withdrawal per year, and being married with both of us having IRAs we alternated years.

Is once a year or once every 2 years periodic? I’m sure it is.

If you're talking of drawdown then there is the one-time 25% HMRC tax free amount. The rest is taxable and can be withdrawn whenever you like.
If you take the pension as a number of lump sums, then each withdraw would have a 25% tax free element.

With drawdown, you can take any retirement distributions as a regularly scheduled withdraw, (usually no more then a year apart), or simply dip in as and when you like.

If you take the lump sum method, then there is usually no scheduled payments and its up to you when you withdraw and the amount.

Be careful of not falling foul of HMRC MPAA rules with flexibly accessing your retirement account. A lifetime annuity is one way to overcome that hurdle.   

If you're talking of drawdown then there is the one-time 25% HMRC tax free amount. The rest is taxable and can be withdrawn whenever you like.

Sorry I should have been more clear, I mean WRT gradually emptying a 401k or IRA.  Is it a case of ‘ call it a lump sum and let HMRC try to prove otherwise?’

I'm taking 401(k) distributions on an annual basis. All set up in advance and can not be changed or modified. For me, it's definitely periodic payments. If distributions are ad-hoc, irregular and unorganised in any form of timing, then you could argue lump sum. Tricky though & i'd be concerned that in an event of audit, defence maybe lacking. If you're talking big bucks, maybe get an accountant onside for certainty.

I never did more than 1 large withdrawal per year, and being married with both of us having IRAs we alternated years.

Is once a year or once every 2 years periodic? I’m sure it is.

So did you take a treaty position that it was periodic and pay uk tax?  Or lump sum and pay us tax?

So did you take a treaty position that it was periodic and pay uk tax?  Or lump sum and pay us tax?

Lump sum and paid US tax.

Thanks.  There is also an interesting thread from last year on bogleheads.org about Roth conversions, lump sums, etc etc.  including a response from HMRC that I believe was posted to the HMRC community forum

For several years - until the Spring of 2022 - HMRC policy was clear. A lump sum was a complete distribution at a single time was a lump sum.  Anything else, no matter how chunky, was periodic.  HMRC changed their view this Spring.  The revised view is both unclear and - also - not in the public domain as yet.  The prufent approach remains as before which is to disclose to HMRC in the white space of the UK return.

So if I fully liquidate my IRA (lump sum) I pay US taxes but not UK taxes under Treaty? Is there anywhere I can get a YES/NO answer on this.

I did this last year with an Inherited IRA, paid US tax and added a note to my HMRC SA. So far they have not complained, but who knows if the even looked at it yet. I am about to do the same with my Trad IRA which has about $40k in it. Going the lump sum route I can pay lower US taxes, however if HMRC don't agree then the lump sum would put me well in the 40% bracket. Hmmm.

So if I fully liquidate my IRA (lump sum) I pay US taxes but not UK taxes under Treaty? Is there anywhere I can get a YES/NO answer on this. …

Sorry to sound cynical but in the world of expat taxes there are few things that have a clear cut yes/no answer - that’s why paying for advice in particular circumstances is often the best route. And even then you aren’t audit proof! I was once audited by the IRS and my advisor and I quickly realized that the agent concerned couldn’t get his head around the UK tax year being different from the US. We prepared a spreadsheet showing how things tied up and all was well. Should that have been a clear cut issue? Of course.  Was it? No. It cost time money and stress.

You are asking about a treaty that is complex and self contradictory in parts. You need to live with some ambiguity but protect yourself with professional, bespoke advice.

Or you take your chances - but that’s stressful.


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Finallly found a concrete answer - posting here for others who may search this forum:

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19853

Lump Sums

A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.

Finallly found a concrete answer - posting here for others who may search this forum:

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19853

Lump Sums

A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.

Right off the HMRC website!  Great find, thanks for sharing.

Finallly found a concrete answer - posting here for others who may search this forum:

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19853

Lump Sums

A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.

We are still waiting for HMRC to offer their interpretation of the words "lump-sum".  HMRC most recently promised this in June, having broken 2 promises they made last year to publish the same interpretation.

The word I got from HMRC was that a "lump sum implies that no further distributions would be made". So they (at least the person who wrote that) appear to be still on the original 100% definition.

This makes me wonder if it would be kosher to open a second IRA, transfer half the funds into it and liquidate one each year? Hmmm.