UK IHT on US IRAs and ROTH IRAs

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.

That is dealing with the tax payable by someone who inherited an IRA, not the IHT that the estate of the person who owned the IRA would pay. Also many of HMRC's responses in that thread are worrying to me as they seem to have never heard of the DTA. The response by HMRC Admin 5 is good IMO.

That is dealing with the tax payable by someone who inherited an IRA, not the IHT that the estate of the person who owned the IRA would pay. Also HMRC's responses in that thread are worrying to me as they seem to have never heard of the DTA.

I guess there are many questions here.  Be sure to let us know when you get a definitive answer from HMRC, which might be a stretch because they often disagree with themselves.  Have you had an opinion on this from a US/UK tax professional?

Of course, the other point to note is that if an IRA is inherited by a spouse then it's a moot point anyway because it'll pass to her/him IHT free.  I assume that's correct?

I guess there are many questions here.  Be sure to let us know when you get a definitive answer from HMRC, which might be a stretch because they often disagree with themselves.  Have you had an opinion on this from a US/UK tax professional?

Of course, the other point to note is that if an IRA is inherited by a spouse then it's a moot point anyway because it'll pass to her/him IHT free.  I assume that's correct?

Yes IHT isn't an issue for a surviving spouse and of course they get the extra threshold too. Still it could just be pain deferred.

If things go so that I need to return to the UK I will definitely get some professional advice before moving and maybe look into an Excluded Property Trust for some assets and come up with an aggressive gifting strategy. The issue really comes down to the vast difference in IHT thresholds between the US and the UK - $13M and £325k respectively. My estate doesn't trouble the current US limit, but it is well over the UK threshold and without being able to exclude US pension assets from UK IHT my estate would have an eye watering tax bill.

I sent a post about UK IHT on IRAs to the HMRC community forum 3 days ago and it still hasn't been posted to the site. It must need a lot of thinking on HMRC's part to formulate an answer. I imagine if it does ever appear I will be directed to the Inheritance Tax department. They probably won't know much about IRAs and their structure (why should they?) so won't be of much help either.

The one glimmer of hope is that IRAs qualify as Excluded Property Trusts.

I sent a post about UK IHT on IRAs to the HMRC community forum 3 days ago and it still hasn't been posted to the site. It must need a lot of thinking on HMRC's part to formulate an answer. I imagine if it does ever appear I will be directed to the Inheritance Tax department. They probably won't know much about IRAs and their structure (why should they?) so won't be of much help either.

The one glimmer of hope is that IRAs qualify as Excluded Property Trusts.

I find this whole thing quite bizarre.  Imagine the situation where an IRA far outweighs other assets - which is entirely possible.  The estate i.e. the executor - likely a beneficiary - could potentially have to close the IRA in order to have enough funds to pay the IHT.  In doing so, they would have to pay 30% of the IRA value in tax to the US (lump sum withdrawal), in order to have the funds they need to pay 40% IHT in the UK.  It's nuts - assuming it's true.

Yes the tax

I find this whole thing quite bizarre.  Imagine the situation where an IRA far outweighs other assets - which is entirely possible.  The estate i.e. the executor - likely a beneficiary - could potentially have to close the IRA in order to have enough funds to pay the IHT.  In doing so, they would have to pay 30% of the IRA value in tax to the US (lump sum withdrawal), in order to have the funds they need to pay 40% IHT in the UK.  It's nuts - assuming it's true.

Agreed, it's not uncommon for IRAs to be a few million dollars, but the US estate tax threshold of $13M means that there's no danger of Federal estate tax and the beneficiaries can take the money out over a number of years, although the IRS has rules about that. If those IRAs are within the estate of a UK domiciled person then a $1M tax bill would not be outlandish and as you point out any lump sum withdrawal from the IRA to pay that bill would also be taxed as income. Another wrinkle is that if the IRA passes directly to the beneficiaries then the estate/executor will have to claw back the money from the beneficiaries. Buzzacotts has some posts about US/UK estate planning, but nothing specific about UK IHT on US pensions, IRAs, 401ks etc. The main way to protect US assets seems to be Excluded Property Trusts set up while a non-dom, but IRAs are never mentioned. That actually gives me a glimmer of hope as no one seems to worry about it.

The potential for large amounts of income tax to also be due on IRAs underlines the importance of TIRA to ROTH IRA rollovers,

FYI here is a depressing take on this by David Treitel who is a guru in this area. Also your nationality and "domicile" are vital to how UK IHT is applied. I also wonder if it would be better to turn an IRA into a lifetime annuity, that would avoid having any pensions balance at death, but probably increase your income tax bill. Of course the annuity route is similar to just taking large withdrawals from the IRA each year, and you still have to spend or gift the money to get it out of the estate, it's only advantage is that the annuity ensures that there's nothing left in the IRA when you die.

https://www.taxationweb.co.uk/forum/tax-on-usa-ira-accounts-t52282.html#:~:text=The%20IRA%20is%20generally%20considered,withdraw%20from%20the%20traditional%20IRA.

FYI here is a depressing take on this by David Treitel who is a guru in this area. Also your nationality and "domicile" are vital to how UK IHT is applied. I also wonder if it would be better to turn an IRA into a lifetime annuity, that would avoid having any pensions balance at death, but probably increase your income tax bill. Of course the annuity route is similar to just taking large withdrawals from the IRA each year, and you still have to gift the money to get it out of the estate, it's only advantage is that the annuity ensures that there's nothing left when you die.

https://www.taxationweb.co.uk/forum/tax-on-usa-ira-accounts-t52282.html#:~:text=The%20IRA%20is%20generally%20considered,withdraw%20from%20the%20traditional%20IRA.

Funnily enough, I had the very same thought a couple of days ago.  Never thought of it before.  The problem might be (in my case) getting an annuity as a non-resident.

Just to summarize what I’ve come to understand  about IRAs and UK IHT.

1) if you are paying UK tax on your worldwide income IRAs will be included in your estate when UK IHT is calculated. If you are coming to the UK you should understand your tax residency status and take appropriate action which might include Excluded Property Trusts.This is particularly important for returning UK citizens or US citizens who plan to live in the UK permanently.
2) at some point you will have to take RMDs and these will be added to any income you have from  private and state pensions and so you  could end up in a high tax bracket. So it might be a good idea to do IRA to ROTH conversions before that happens. Even if you are taking IRA distributions and RMDs will be moot, ROTH conversions will make that taxes of your beneficiaries in the US and particularly in the UK far easier and they won’t have to pay any income tax on the ROTH withdrawals. I’m going to estimate what my marginal tax rate might be with all my pensions and my RMDs at age 75 and do ROTH conversions each year up to the top of the tax bracket below that..
3) gifting can  reduce your estate. The IRS allows you to give $18k per year per donee without having to fill in any forms and the UK pro rates the amount of a gift excluded from your estate over 7 years if you done die  before that,  the UK also allows you to immediately remove amounts of “excess income” from your estate if you gift tem away. Eg if you have pensions and are living off IRA withdrawals you can give the pensions to someone, the pensions basically never go into your estate as far as HMRC are concerned.

Good summary. For number 3 I would say that you can’t include the sale of shares as part of your excess regular income, so withdrawing IRA dividends is considered income like a pension but selling IRA shares to withdraw money is not allowed in that calculation to exclude the gift from IHT.

Good summary. For number 3 I would say that you can’t include the sale of shares as part of your excess regular income, so withdrawing IRA dividends is considered income like a pension but selling IRA shares to withdraw money is not allowed in that calculation to exclude the gift from IHT.

FYI, I got an answer from HMRC Community about IRAs being included or excluded from the estate of someone who pays tax on their worldwide income. They told me to "Please contact the Inheritance Tax team for advice." I will now just write them a letter and might get an answer in a few months I suppose.

I am currently filling up the US 24% tax bracket to do IRA to ROTH conversions so that my UK beneficiaries don't get hit with income tax, but what happens if I'm doing ROTH conversions while UK resident? I see that there might be a way to avoid a 40% UK income tax hit if the conversions are considered "lump sums" ie "non-periodic" by HMRC, but it looks like the Saving Clause (Article 1-4) makes the treaty irrelevant and that we are totally reliant on UK domestic law.

FYI, I got an answer from HMRC Community about IRAs being included or excluded from the estate of someone who pays tax on their worldwide income. They told me to "Please contact the Inheritance Tax team for advice." I will now just write them a letter and might get an answer in a few months I suppose.

You'd think this would be an obvious yes or no answer.  The fact that they can't say outright yes or no makes me wonder.  Mind you, I wouldn't believe any answer given on the community forum anyway - it seems like it's run by interns.  I'd want it in writing.  Good luck.  Isn't there a number you can call for the inheritance team?  Oh wait, are you abroad?

You'd think this would be an obvious yes or no answer.  The fact that they can't say outright yes or no makes me wonder.  Mind you, I wouldn't believe any answer given on the community forum anyway - it seems like it's run by interns.  I'd want it in writing.  Good luck.  Isn't there a number you can call for the inheritance team?  Oh wait, are you abroad?

Yes there is a phone number and yes I'm abroad. I don't want the phone charges and I'm happy to go the mail route. I'll be paying for professional advice if this becomes relevant to me and I think I know the answer anyway.

FYI, I got an answer from HMRC Community about IRAs being included or excluded from the estate of someone who pays tax on their worldwide income. They told me to "Please contact the Inheritance Tax team for advice." I will now just write them a letter and might get an answer in a few months I suppose.

I am currently filling up the US 24% tax bracket to do IRA to ROTH conversions so that my UK beneficiaries don't get hit with income tax, but what happens if I'm doing ROTH conversions while UK resident? I see that there might be a way to avoid a 40% UK income tax hit if the conversions are considered "lump sums" ie "non-periodic" by HMRC, but it looks like the Saving Clause (Article 1-4) makes the treaty irrelevant and that we are totally reliant on UK domestic law.

We continued IRA to Roth conversions when we returned to England. Each year one of us would do a single lump sum conversion so that it wasn’t periodic and was only taxed by the IRS, even though once every 2 years is probably mathematically defined  as periodic, just a long period.

Yes there is a phone number and yes I'm abroad. I don't want the phone charges and I'm happy to go the mail route. I'll be paying for professional advice if this becomes relevant to me and I think I know the answer anyway.

It may all change in next month’s budget.

https://ifamagazine.com/autumn-budget-2024-pension-sector-runners-and-riders/

It has long been seen as overly generous that since 2015, a death before the age of 75 results in virtually no tax on Defined Contribution pension withdrawals while deaths after age 75 see pension benefits paid inheritance tax free.
Changing one or both of these rules would be a relatively easy move and potentially lucrative. This could risk devaluing the benefit of pensions as a savings method and from a technical point of view, there could be complications around trust laws.
Likelihood? 4/5. A reversal of the unusually generous 2015 rules for deaths before 75 is most likely.