UK IHT on US IRAs and ROTH IRAs

I'm a US/UK dual citizen looking at returning to live in the UK permanently. I have US IRAs and ROTH IRAs that are below the current US estate tax threshold, but I'm wondering how they will be treated for UK IHT? Will they be treated like UK pensions by HMRC and thus escape IHT when passed on to my UK citizen beneficiaries?

Even if they were treated like UK pension pots they only escape IHT if the person is 74 years or younger.

Even if they were treated like UK pension pots they only escape IHT if the person is 74 years or younger.

I thought that was for income tax of the beneficiary. I believe that pensions don’t count in the calculation of IHT in the UK and wondered it that extends to foreign pensions owned by UK residents.

I thought that was for income tax of the beneficiary. I believe that pensions don’t count in the calculation of IHT in the UK and wondered it that extends to foreign pensions owned by UK residents.

You are probably correct. Rumor has it that there will be a change in pension savings and IHT in next month’s budget so it might all change or become clearer then.

I don’t have a UK pension pot, but do have a Roth IRA but I have little hope that it will treated like a UK SIPP when it comes to IHT.

You are probably correct. Rumor has it that there will be a change in pension savings and IHT in next month’s budget so it might all change or become clearer then.

I don’t have a UK pension pot, but do have a Roth IRA but I have little hope that it will treated like a UK SIPP when it comes to IHT.

Well your US ROTH is treated better than your UK SIPP, when you are alive, as it's tax free in US and UK. Right now UK pensions don't form part of your estate for the calculation of UK IHT (this is not the case in the USA but the US has a estate tax threshold of $13M).  I'm not too worried about US estate taxes, but UK IHT will be an issue and it will be a big help if my US IRAs don't get included in my UK estate. I have read that this is the case, but wanted to run it by the UK-Yankee hive mind.

Well your US ROTH is treated better than your UK SIPP, when you are alive, as it's tax free in US and UK. Right now UK pensions don't form part of your estate for the calculation of UK IHT (this is not the case in the USA but the US has a estate tax threshold of $13M).  I'm not too worried about US estate taxes, but UK IHT will be an issue and it will be a big help if my US IRAs don't get included in my UK estate. I have read that this is the case, but wanted to run it by the UK-Yankee hive mind.

My wife doesn’t need my Roth, and my will plus beneficiaries designation leave my Roth to our children. I expect to die before my wife so her estate should not be boosted by my Roth inheritance. We have already gifted over $1m to our children who have used it to buy houses in England, and that has already passed the 7 year gift rule, and we continue to gift to them.

My wife doesn’t need my Roth, and my will plus beneficiaries designation leave my Roth to our children. I expect to die before my wife so her estate should not be boosted by my Roth inheritance. We have already gifted over $1m to our children who have used it to buy houses in England, and that has already passed the 7 year gift rule, and we continue to gift to them.

I'm also giving to younger members of my family in the UK using the annual US gift tax exemption. If I move to the UK the money I put into a new house and my general investment accounts will put me well over the UK's IHT limit, but if my US IRAs etc are also included in the estate, then the UK IHT bill will be very large. But I think they might be excluded from my estate for calculating the UK IHT and if they are it will make IHT planning a lot easier. I don't worry about US estate taxes.

I'm also giving to younger members of my family in the UK using the annual US gift tax exemption. If I move to the UK the money I put into a new house and my general investment accounts will put me well over the UK's IHT limit, but if my US IRAs etc are also included in the estate, then the UK IHT bill will be very large. But I think they might be excluded from my estate for calculating the UK IHT and if they are it will make IHT planning a lot easier. I don't worry about US estate taxes.

If you do find out definitively one way or another please do let me know. A few years ago I printed out a copy of the rules on pension savings and IHT and put it with our wills with a note about our IRAs to remind our executor to look into it when the last of us dies. Unlike yourself I am married with children who will inherit our main home so our IHT allowance is £1m and I’m not too concerned about IHT given how much we will already have given to the kids.

FYI there might be a fly in the ointment. One source claims that to be excluded from IHT the trustees of a pension must have discretion as to the beneficiaries and this is generally covered by a letter of intent or the will. Most US pensions have a binding beneficiary designation and so the pension falls back into the IHT calculation in the UK...so maybe we need to delete those beneficiary designations were are always told to make sure are up to date? Then the pension would just go into the estate and probate, looks like a lawyer/tax expert is required.

FYI there might be a fly in the ointment. One source claims that to be excluded from IHT the trustees of a pension must have discretion as to the beneficiaries and this is generally covered by a letter of intent or the will. Most US pensions have a binding beneficiary designation and so the pension falls back into the IHT calculation in the UK...so maybe we need to delete those beneficiary designations were are always told to make sure are up to date? Then the pension would just go into the estate and probate, looks like a lawyer/tax expert is required.

The joys of managing international finances.

FYI here is a document that you might find useful. There is a sentence on page 12 that just state that Traditional IRAs and 401ks are outside the scope of UK inheritance tax...no mention of beneficiary designations. So as usual in international tax there are conflicting answers online.

https://masecoprivatewealth.com/sites/default/files/2022-11/Estate%20Planning%20for%20US%20families%20in%20the%20UK_0.pdf

FYI here is a document that you might find useful. There is a sentence on page 12 that just state that Traditional IRAs and 401ks are outside the scope of UK inheritance tax...no mention of beneficiary designations. So as usual in international tax there are conflicting answers online.

https://masecoprivatewealth.com/sites/default/files/2022-11/Estate%20Planning%20for%20US%20families%20in%20the%20UK_0.pdf

Pretty sure I recently saw an answer on HMRC's community forum from an HMRC Admin that IRAs are outside the scope of IHT.  Subsequent withdrawals would be taxable, obviously.

I've looked on there and all I can see are answers that suggest contacting the Inheritance Tax Team. I've submitted a question anyway and will report any answers. There's an old thread on this forum that comes to the conclusion that IRAs/401ks are excluded from UK IHT, but it makes no mention of designated beneficiaries or the structure of US pensions as it relates to why UK pensions fall outside of UK IHT, so I'm looking for something about that in an answer. There are a number of sources from what look like professional taxation specialists that just say "US pensions are exempt from UK IHT" which is worrying to me. My current belief is that US pensions, IRA 401k etc, are NOT excluded from UK IHT and if I return to the UK I will seek professional advice.

FYI after much browsing I think I have a working theory.

UK pensions like the SIPP are discretionary trusts and the trustees decide who are the beneficiaries, although there's a "letter of wishes" to inform their decision. These trusts fall outside of UK IHT because after death the SIPP trustee has control of who gets the money. UK non-doms have a UK IHT planning option of putting assets into "Excluded Property Trusts" which are offshore discretionary trusts and these also fall outside of UK IHT. Now we come to US Individual Retirement Accounts. The clue is in the name. These are owned by the individual and are not discretionary as they have named beneficiaries or pass into the individual's estate on death. So there's no discretion as to who inherits the money.

I believe that the bolded comments in this thread are not correct

https://talk.uk-yankee.com/index.php?topic=101357.15

I spoke to Jim Stidham a partner and a colleague who took notes. It was an excellent conversation that I would describe as an initial free consultation, rather than an onboarding. I genuinely had the sense they were talking from practical experience rather than just reading and interpreting the DTA.

He did confirm emphatically that the IRA Rollover account is defined in the notes to the UK US DTA as a pension scheme and would pass directly to the named direct descedent beneficiaries and not be part of his UK estate for IHT. He also said Schwab were in his experience pretty good at opening the Inherited IRAs including for non-residents.  We also discussed how the drawdowns are taxed (in the UK if regular distributions), how the social security is declared etc and he confirmed this all sounded correct.

We agreed that at this stage there wasnt a need for them to do any work but we'd see what the Autumn budget brings as Labour rumoured to be looking at changes to both CGT, IHT and pensions taxation.

I subsequently looked up the notes to the DTA,  see page 14 of https://home.treasury.gov/system/files/131/Treaty-UK-Protocol-TE-7-22-2002.pdf

HMRC will look at the structure of the finances immediately prior to death. So in the above example the money was in an IRA and thus subject to UK IHT on death. The money did indeed pass to the designated beneficiaries, but the executor of the estate will still have to make sure the UK IHT is paid (the owner of the IRA was UK domiciled) from other funds in the estate or by getting money from the beneficiaries. I will be very glad if I'm proved wrong in this and obviously I am not a tax professional and everything I wrote should be taken with masses of salt.

It's here

https://community.hmrc.gov.uk/customerforums/sa/2535b7a2-1c36-ee11-a81c-002248c79814#:~:text=You%20will%20not%20declare%20the,financial%20adviser%20regarding%20your%20options.

in the answer to Stephanie Thomas by Admin 19.