UK Inheritance Tax treatement US Rollover IRA

Im supporting my father with his finances. He is British and UK domiciled and  resident, green card given up in 2006 when he retired after 10 years in the US where he still has legacy investments.
 
Primary US asset is a substantial Rollover IRA with Schwab. I think the income tax situation is fairly under control. Minimum withdrawals are being taken and treated as UK income (regular payments) with US W8-BEN in place no withholding tax (and successfully reclaimed for years when wht was paid). We file a US return that taxes account of his US social security payments, a US company pension and income/gains from a vanilla mutual fund account too.

Main focus now is on  the eventual UK IHT treatment of this Rollover IRA. He has nominated direct descendent beneficiaries (me, sister and her daugther, the latter two both US resident/citizens) with a view to avoiding probate issues in US.

Im struggling like hell to confirm the UK IHT treatment. My view (from reading various sources including the great material here) is that it should be treated as pension assets in trust under the double tax agreement, therefore excluded from the UK estate. The beneficiaries will end up with legacy rollover accounts to be drawndown and taxed as income at their marginal rate  over max 10 years (subject to Schwab being willing to open one for me Swiss resident/citizen). But views seem to differ and I havent been able to find any real life examples and I havent been able to identify the right advisor to help yet.

Any insights appreciated. Danny

Im supporting my father with his finances. He is British and UK domiciled and  resident, green card given up in 2006 when he retired after 10 years in the US where he still has legacy investments.
 
Primary US asset is a substantial Rollover IRA with Schwab. I think the income tax situation is fairly under control. Minimum withdrawals are being taken and treated as UK income (regular payments) with US W8-BEN in place no withholding tax (and successfully reclaimed for years when wht was paid). We file a US return that taxes account of his US social security payments, a US company pension and income/gains from a vanilla mutual fund account too.

Main focus now is on  the eventual UK IHT treatment of this Rollover IRA. He has nominated direct descendent beneficiaries (me, sister and her daugther, the latter two both US resident/citizens) with a view to avoiding probate issues in US.

Im struggling like hell to confirm the UK IHT treatment. My view (from reading various sources including the great material here) is that it should be treated as pension assets in trust under the double tax agreement, therefore excluded from the UK estate. The beneficiaries will end up with legacy rollover accounts to be drawndown and taxed as income at their marginal rate  over max 10 years (subject to Schwab being willing to open one for me Swiss resident/citizen). But views seem to differ and I havent been able to find any real life examples and I havent been able to identify the right advisor to help yet.

Any insights appreciated. Danny

Only speaking from personal experience here, I’m not a tax pro. My wife and I also have US pensions and SS payments all of which are taxable by HMRC and when we file our IRS return use foreign tax credits to zero them out. However, the SS payments are taxable ONLY in the UK as per the treaty so when it is shown on our IRS return the taxable portion is zero.

Good luck opening an IRA to receive the eventual inherited IRA from overseas. I already made sure our children have IRAs open before they returned to the UK but I really don’t know if that will be sufficient for them to eventually receive inherited Roth IRAs from me. We recently cashed in my wife’s Roth IRA and are buying houses in her name only to rent out here in England.

I don’t know the answer as to how the IRAs will be treated by HMRC but if they are treated like their UK equivalents (SIPPs) then they will excluded from IHT if the deceased was under the age of 75 otherwise they will be part of their estate subject to IHT.

The way we are approaching the situation is that I expect to die first and my wife does not need my Roth IRA so I have set the beneficiaries to be our children.

I'm very interested in this topic also.

Firstly, I agree with @durhamlad that SS payments are only taxable in the country of residence, per the tax treaty.  I've been declaring mine to HMRC and not the IRS.

Secondly, I really wasn't aware of the age 75 threshold on pensions, which is a bit of a pain.  Having said that, I have my wife as the first beneficiary, so even if it were part of the estate, I assume it could transfer to her IHT-free.  More complicated is if my wife dies before me, so our son(s) become the beneficiaries.  If that were to happen, I suppose the best course of action is to withdraw most, if not all of it,  by the age of 75.  That, in itself, causes another problem because it'll then sit as cash in the UK, so will definitely be part of the estate.  But it may be the lesser of two evils.

I'm very interested in this topic also.

Firstly, I agree with @durhamlad that SS payments are only taxable in the country of residence, per the tax treaty.  I've been declaring mine to HMRC and not the IRS.

Secondly, I really wasn't aware of the age 75 threshold on pensions, which is a bit of a pain.  Having said that, I have my wife as the first beneficiary, so even if it were part of the estate, I assume it could transfer to her IHT-free.  More complicated is if my wife dies before me, so our son(s) become the beneficiaries.  If that were to happen, I suppose the best course of action is to withdraw most, if not all of it,  by the age of 75.  That, in itself, causes another problem because it'll then sit as cash in the UK, so will definitely be part of the estate.  But it may be the lesser of two evils.

To answer my own post ... it seems pretty clear that pensions - and I assume that a rollover IRA is a pension - are outside IHT.  The only issue is when the pensioner dies over age 75, income from the pension paid to beneficiaries is subject to income tax.  Details here

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/pensions-and-inheritance#is-my-pension-subject-to-inheritance-tax

So, is your question whether a Rollover IRA is classed as a pension by HMRC?

Firstly, I agree with @durhamlad that SS payments are only taxable in the country of residence, per the tax treaty.  I've been declaring mine to HMRC and not the IRS.

I agree with this too, but the US CPA declares the SS amount in the 1040 NR as pensions and annuity income of which none is taxable. Ditto the IRA withdrawals on the basis these are regular (defined very broardly) payments.

I also understand that any *lump sum* withdrawal eg a full liquidation or very irregular amount well in excess of the minimum required annually would be taxable in the US but not the UK.

So, is your question whether a Rollover IRA is classed as a pension by HMRC?

Yes, however I can find different views online. For example (Birketts LLP online article) that the IRA beneficiaries are not at the discretion of the pension trustees but nominated by the beneficiary it does not pass muster as a pension whereas a briefing document by another firm (Maseco) states unambiguously they are exempt.

There is no doubt that the beneficiaries will pay tax on the distribution from this IRA, but at much lower marginal rates than would be the case by indirectly paying 40%UK IHT. Furthermore, it will provide a nice savings tax wrapper for the future for my US resident sister and niece.

I have contacted Blick Rothenburg mentioned elsewhere on this forum with a view to getting an opinion

I agree with this too, but the US CPA declares the SS amount in the 1040 NR as pensions and annuity income of which none is taxable. Ditto the IRA withdrawals on the basis these are regular (defined very broardly) payments.

I also understand that any *lump sum* withdrawal eg a full liquidation or very irregular amount well in excess of the minimum required annually would be taxable in the US but not the UK.

I agree on both points. On our 1040 each year we report the full amount as listed on the SSA-1099 in box (a) and zero as the taxable amount in box(b).

While living in the UK we have both done irregular lump sum withdrawals of our IRAs (converting them into our Roths) which have only been taxable in the USA.

I agree on both points. On our 1040 each year we report the full amount as listed on the SSA-1099 in box (a) and zero as the taxable amount in box(b).

While living in the UK we have both done irregular lump sum withdrawals of our IRAs (converting them into our Roths) which have only been taxable in the USA.

Can I ask you about your Roth IRAs?  Presumably they were some other form of IRA, or 401(k) beforehand.

When you converted to Roth, did you incur a big tax bill?
And was that tax automatically withheld by your provider and submitted to the IRS?
Did you need to file a US tax return to adjust that tax, if it was too little or too much?
And going forward (I hate that term), is it a fact that withdrawals from your Roth IRA are not taxable in either the US or the UK?

Can I ask you about your Roth IRAs?  Presumably they were some other form of IRA, or 401(k) beforehand.

When you converted to Roth, did you incur a big tax bill?
And was that tax automatically withheld by your provider and submitted to the IRS?
Did you need to file a US tax return to adjust that tax, if it was too little or too much?
And going forward (I hate that term), is it a fact that withdrawals from your Roth IRA are not taxable in either the US or the UK?

The year I retired I converted my traditional deductible IRA to a Roth (the IRA gains were taxed), the following year I rolled my 401k to an IRA (non taxable event). My wife did the same. Each year after we began converting sums from our IRAs to our Roths, all taxable. By the time we had moved back to the UK we still had IRA money to move so on alternating years we converted to our Roths which took us 4 years to complete it all, again only paying US taxes.

US taxes only, I used quarterly estimated tax payments through EFTPS to pay the taxes, paying the balance when we filed our US taxes. I always made sure I made “safe harbor” with tax payments so never got underpayment penalties.

The Roths are indeed tax free in both countries and I have been taking tax free Roth distributions this past 3 years. We never paid more than 17% tax on those conversions which took 10 years total to complete.

The year I retired I converted my traditional deductible IRA to a Roth (the IRA gains were taxed), the following year I rolled my 401k to an IRA (non taxable event). My wife did the same. Each year after we began converting sums from our IRAs to our Roths, all taxable. By the time we had moved back to the UK we still had IRA money to move so on alternating years we converted to our Roths which took us 4 years to complete it all, again only paying US taxes.

US taxes only, I used quarterly estimated tax payments through EFTPS to pay the taxes, paying the balance when we filed our US taxes. I always made sure I made “safe harbor” with tax payments so never got underpayment penalties.

The Roths are indeed tax free in both countries and I have been taking tax free Roth distributions this past 3 years. We never paid more than 17% tax on those conversions which took 10 years total to complete.

Thanks for that useful info.  I've probably missed the boat on doing that.

It's interesting you say that Roth IRAs are tax-free in both countries.  I've just read on another forum that Vanguard have started withholding 30% from Roth IRAs for NRAs regardless.  Just means claiming it back from the IRS but what a pain.

Thanks for that useful info.  I've probably missed the boat on doing that.

It's interesting you say that Roth IRAs are tax-free in both countries.  I've just read on another forum that Vanguard have started withholding 30% from Roth IRAs for NRAs regardless.  Just means claiming it back from the IRS but what a pain.

There are forms you can file with the brokerage to exempt the 30% withholding from Roths I think.  - W-8BEN is the form I think.

https://www.investopedia.com/terms/w/w8form.asp

W-8 forms are Internal Revenue Service (IRS) forms that foreign individuals and businesses must file to verify their country of residence for tax purposes, certifying that they qualify for a lower rate of tax withholding.

Although the W-8 forms are issued by the IRS, they are submitted only to payers or withholding agents, not to the IRS. Failure to submit the form may result in a withholding at the full 30% rate that applies to foreign entities.

There are forms you can file with the brokerage to exempt the 30% withholding from Roths I think.  - W-8BEN is the form I think.

https://www.investopedia.com/terms/w/w8form.asp

That is indeed the form.  I have one filed with Fidelity.  Unfortunately for Vanguard customers (according to a very reliable source on another forum), they have decided to ignore the W-8BEN.  Vanguard are within their right to do so apparently - it's a backside covering exercise on their part.

Yes, however I can find different views online. For example (Birketts LLP online article) that the IRA beneficiaries are not at the discretion of the pension trustees but nominated by the beneficiary it does not pass muster as a pension whereas a briefing document by another firm (Maseco) states unambiguously they are exempt.

There is no doubt that the beneficiaries will pay tax on the distribution from this IRA, but at much lower marginal rates than would be the case by indirectly paying 40%UK IHT. Furthermore, it will provide a nice savings tax wrapper for the future for my US resident sister and niece.

I have contacted Blick Rothenburg mentioned elsewhere on this forum with a view to getting an opinion

I'm pretty convinced that inheriting an IRA is not, in itself, subject to IHT.  There are answers on the HMRC community forum, from HMRC Admin staff, that confirm this - however, I daresay HMRC would argue that answers from their staff on a forum are not legally binding.

I've contacted several US/UK tax experts online today and only one has responded - and that was to say they couldn't help me.

Did you get a response from Blick Rothenburg?

I'm pretty convinced that inheriting an IRA is not, in itself, subject to IHT.  There are answers on the HMRC community forum, from HMRC Admin staff, that confirm this - however, I daresay HMRC would argue that answers from their staff on a forum are not legally binding.

I've contacted several US/UK tax experts online today and only one has responded - and that was to say they couldn't help me.

Did you get a response from Blick Rothenburg?

Actually inheriting the IRA is not taxable for the recipient is for sure. The distributions out of the legacy IRAs that ensue will likely be taxable as income for UK or US residents.  Then there is the whole question if the US institution will actually open a legacy IRA for non residents.

We need to be precise with language here: "Is the IRA part of the UK estate for IHT purposes if it has been left to nominated [non resident] beneficiaries?".  The DTA is reasonably clear, but the key issue seems to be whether the IRA can be considered to be "in trust".

I have an intial call with BR on Thursday and will report back. My fathers own UK tax advisor has also struggled thus far to find correspondent firms who are able to advise. It's clearly quite a niche topic.

Actually inheriting the IRA is not taxable for the recipient is for sure. The distributions out of the legacy IRAs that ensue will likely be taxable as income for UK or US residents.  Then there is the whole question if the US institution will actually open a legacy IRA for non residents.

We need to be precise with language here: "Is the IRA part of the UK estate for IHT purposes if it has been left to nominated [non resident] beneficiaries?".  The DTA is reasonably clear, but the key issue seems to be whether the IRA can be considered to be "in trust".

I have an intial call with BR on Thursday and will report back. My fathers own UK tax advisor has also struggled thus far to find correspondent firms who are able to advise. It's clearly quite a niche topic.

Must admit, you lost me there with the "in trust" comment.  Could you elaborate briefly for my benefit?  I've nominated my wife as first beneficiary, and sons 50-50 otherwise.  Does the "in trust" comment apply in this case?

As to whether the provider will open an Inherited IRA for non-residents - that's a whole other can of worms.