HMRC Feedback on Lump Sum Payments (etc.) in the Tax Treaty

I have been reading these forums recently - I am a UK Citizen, living in the UK and with historical pensions / 401(k) from historical employment in the US. I've learned a lot from here, but there has been a comment made on the HMRC Community Forum that I'm not sure everyone is aware of. It affects some of the advice given here, particularly regarding the Taxation of Lump-Sum distributions from IRA's.

The post can be found here, on page 3 >>> https://rb.gy/49h3xe [nofollow]

There is a lot to unpack in this feedback from HMRC but in regard to Lump-Sum payments they offer an interpretation on what they consider a Lump-Sum. They also offer an interpretation that Article 17(2) is subject to the 'Savings Clause' in article 1(4) because it is excluded from protection of the Tax treaty by virtue of it not being protected by Article 1(5). Their interpretation is that Lump-Sum payments made in the UC are indeed taxable by the US (in the first instance) but that they also have the right to tax the same amount in the UK, giving Tax relief for any tax paid in the US under the Double Taxation arrangements.

Reading many tax forums I know this is not an interpretation that many implement or suggest in the advice, and often say a Lump Sum is taxable only in the US and exempt from UK tax.

It would be interesting to see what others think of the HMRC comments.

G

I thought it was worth copying and pasting the relevant text (regarding Lump-Sum payments) from the HMRC post. This is below.

The relevant point is that I have seem much advice suggesting that Article 17(2) of the Tax Treaty which many quote as a reason to only tax distributions of Lump sums from a US IRA / 401(k) in the USA, and by extension claim exemption from UK tax. This HMRC interpretation clearly disagrees with this position as explained in the text.

I'd be interesting in any counter opinions as it is something I'm dealing with at the moment in my 22/23 UK tax return, and in my planning for closing out the 2023 US Tax year.

Cheers

G



Lump Sum Payments
 
 There is no legislative definition of a lump sum but HMRC regards these as being any non-periodic payment of a pension, that is, any non-regular payment that decreases the value of the remaining pension pot after such payment is made. For example, the first (IRA) withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7, such payments will not be regarded as periodic and will be treated as lump sums under the UK/USA Double Taxation Agreement (DTA). Whereas any amount withdrawn in set, periodic, frequent intervals, that is weekly, monthly, annually and so on would not be a lump sum, but rather periodic payments.
 
 Article 17(2) of the UK/USA DTA provides the US with the right to tax any lump sum payment which is made from a US sourced pension scheme, including IRAs. However, the UK is also permitted to tax the same lump sum payment(s), which is in accordance with Article 1(4) of the DTA, both Article 17(2) and Article 1(4) are outlined below and, when read from the perspective of a UK resident, state:
 
 Article 17(2) - Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State [USA] and beneficially owned by a resident of the other Contracting State [UK] shall be taxable only in the first-mentioned State [USA].
 
 Article 1(4) - Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State [UK and/or USA] may tax its residents, and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
 
 A UK resident, Article 1(4) above permits the UK to tax any US sourced lump sum payment received, as if Article 17(2) of the DTA was not in force or applicable, Article 1(4) effectively ‘overrides’ the provision at Article 17(2), and the consequence is that both the UK and USA can tax any lump sum payment received from a US sourced pension scheme.
 
 In these situations, double taxation will occur since both the UK and the USA can tax the same income. However, that double taxation will be eliminated in accordance with Article 24(4)(a) of the DTA which requires the UK, as the country of residence, to provide Foreign Tax Credit Relief (FTCR) to offset the US tax correctly paid against the UK tax charged on the same the IRA withdrawal.

Thanks for the quoted section because the link in your first post did not work for me.

The past paragraph of the quoted passage seems to contradict the argument of the proceeding. Will it be subject to double taxation or not?
Seems ok to withdraw sums as long on a regular basis.

Seems ok to withdraw sums as long on a regular basis.

Could you expand on this. Do you mean "not on a regular basis"?

HI Duram Lad,
'There is no legislative definition of a lump sum but HMRC regards these as being any non-periodic payment of a pension, that is, any non-regular payment that decreases the value of the remaining pension pot after such payment is made. For example, the first (IRA) withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7, such payments will not be regarded as periodic and will be treated as lump sums under the UK/USA Double Taxation Agreement (DTA). Whereas any amount withdrawn in set, periodic, frequent intervals, that is weekly, monthly, annually and so on would not be a lump sum, but rather periodic payments.'

I meant that as long as sums are withdrawm on a regular periodic basis, they will not be regarded as lump sums. It seems a difficult definition as one withdrawal could be a lump sum or the first of a series of regular withdrawals.
This just something which might affect my partner in a few years, when pension investments have to be withdrawn, so I am told.
 

HI Duram Lad,
'There is no legislative definition of a lump sum but HMRC regards these as being any non-periodic payment of a pension, that is, any non-regular payment that decreases the value of the remaining pension pot after such payment is made. For example, the first (IRA) withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7, such payments will not be regarded as periodic and will be treated as lump sums under the UK/USA Double Taxation Agreement (DTA). Whereas any amount withdrawn in set, periodic, frequent intervals, that is weekly, monthly, annually and so on would not be a lump sum, but rather periodic payments.'

I meant that as long as sums are withdrawm on a regular periodic basis, they will not be regarded as lump sums. It seems a difficult definition as one withdrawal could be a lump sum or the first of a series of regular withdrawals.
This just something which might affect my partner in a few years, when pension investments have to be withdrawn, so I am told.
 

Perfect, thanks for this.

As is stated there is no legislative definition of 'Lump Sum', on either side. Regardless of what HMRC say in this area, feedback from my advisors is that it is the Country where the payment originates who get to decide whether it is a lump sum or not. Imagine if a payment from the US was determined to be a lump sum, and the UK decided it was not (or vice versa). Can you imagine the legal battles between the two? So in practice, I think the UK would accept this despite their aspirations.

G