US Fedearl & State Tax Exempt Disability Police Pension Question

Hi all,

This is my first post here, I have tried to do some research and look at old messages but couldn't find an answer so I hope y'all can help me.

This is DH's situation:-
DH was disabled out of the Police Force in 2003 and has a 50% Tax Free Disability Pension with free US health care coverage for life.  He basically took 50% of his then current pay and receives it Tax Free, he is exempt from paying State & Federal taxes.

We are going to be locating back to the UK for my benefit as I am very homesick for family and have been out of the UK since Sept 1998.  I received US Citizenship in September 2008.

My DH's pension is currently paid into our Bank of America Checking Account every month by direct deposit.  The company that cuts his check will NOT direct deposit it into a UK Bank so we will continue with direct deposit into the BofA account.  All will be in US Funds.  From then on we intend to go via HiFX and use their services, direct deposit from our checking account into their account who then transfer the funds into British Pounds and then direct deposit every month into my British Bank account.

I have been told different thing by numerous different people regarding the Tax status of my DH's pension.  Accountant says no it is not Taxable in the UK as we are still required to file US Tax Returns etc.., the company that cuts his check have also said No it is not Taxable in the UK and members of other forums have said yes it is and keep sending me links to the Inland Revenue Service etc.  The trouble is it is all well and good sending me that info but everything that is mentioned in the links is about UK Pensions and it rather goes over my head if I was honest.

We will be filing (W-4P) with the IRS every year regardless because the US is where my DH's Pension is derived from.  How does the UK Government and/or UK Bank view $2400 or approx 1600 pounds at todays exchange rate being deposited every month into a UK Bank account.  What taxes do we need to file and when I get a job I understand I too will have to declare my UK income to the IRS as I am now a US Citizen.  I also understand that I can't be double taxed.  I am however having a lot of trouble getting the answer to whether my DH's Tax Exempt US Pension can be taxed in the UK if it is paid by a US County Government, check cut by a US Company, Direct deposited into a US Bank in US Funds and then leaves that US Bank for a Canadian Bank converted into Sterling and then Direct deposited into a UK Bank. 

How does the UK Government or UK Bank view this money?

Because I have dual citizenship do I have to declare any new income I get in the UK back to the US Government.  I am assuming I do but I thought I would ask.  My DH & I have filed jointly every year since we married in March 1999.

Any help would be very appreciated.  I have called an International Tax Attorney who is 90 mins away but at $300 per hr and what he reckons is 3 hrs of work, research, typing etc.. I can't really afford $900 at the moment to find out the answers I seek.

Thanks in advance.

Article 17.1 of the Dounle Taxation Agreement between the US and the UK reads :-

1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

  (b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

OK it is late, the the brain is starting to tire but if I am reading that correctly 1(a) is saying that a pension is taxable only where the person lives, and not in the other state.

Then 1(b) goes on to override that and say that where the pension is exempt in the other state, it shall also be exempt in the state in which the person lives.

So as I read it, because the pension is exempt in the States it is also exempt in the UK.

$300 per hour? 3 hours? Hmmm!  It took me less than 5 minutes to access the DTA on the HMRC website, and locate Article 17.

Here is the link to the DTA ... click here.

Article 17.1 of the Dounle Taxation Agreement between the US and the UK reads :-

OK it is late, the the brain is starting to tire but if I am reading that correctly 1(a) is saying that a pension is taxable only where the person lives, and not in the other state.

Then 1(b) goes on to override that and say that where the pension is exempt in the other state, it shall also be exempt in the state in which the person lives.

So as I read it, because the pension is exempt in the States it is also exempt in the UK.

$300 per hour? 3 hours? Hmmm!  It took me less than 5 minutes to access the DTA on the HMRC website, and locate Article 17.

Here is the link to the DTA ... click here.

Thank-you...............A lot of the HMRC stuff goes over my head, I really appreciate you taking the time to look at it.  I would of thought that the US/UK Treaty would over-ride any other laws regarding taxing his Pension so I am to take that the Double Taxation Policy would cover his Pension.  If is is Tax-Free here in the US then it would be the same in the UK.  Makes sense to me.  Some people were trying to tell me that his US Pension would be viewed as the equivalent UK Pension and therefore held to the rules/laws of the UK Government regarding Disability Pensions in the UK but I don't see how you can apply those laws as he earned his money in the US under US Laws and disabled out under US Laws and is taxed or not taxed under US Laws.  You can't really compare Pensions from two entirely different countries under two completely different tax systems etc...  I hope I'm making sense, as I said before a lot of this goes way over my head.

I do have another question though.......if you don't mind.

Us bringing his money into the UK through HiFX, is this the best, cheapest, easiest way to go?  I just need what the easiest, cheapest, safest way to access his money is for paying rent, utilities, food, car tax, MOT's, TV etc.... everyday living expenses until at least I get a job then hopefully DH will also find work. 

Also how will the bank view a regular deposit every month which isn't through a regular UK Pay Check?

Also do I have to let the UK Government know about DH's money or just go get a job, let the employer pay my taxes etc, take my pay check and then file my US Taxes every year to declare my earnings and my DH's Pension like we do whil living in the US?

Thanks in advance.

Are you familiar with Barclay's Bank in the UK? Do a search for that here. Barclay's and BofA have some sort of financial arrangement whereby you can get money out of your BofA US account from Barclay's.

More knowledgable folk than me will be along shortly to give you some ideas.

Are you familiar with Barclay's Bank in the UK? Do a search for that here. Barclay's and BofA have some sort of financial arrangement whereby you can get money out of your BofA US account from Barclay's.

More knowledgable folk than me will be along shortly to give you some ideas.

Yes I already knew that, we vacationed over in the UK this past September and asked our BofA Branch about ATM fees if we needed to take any cash out.  They said that as long as I used a Barclay's Bank ATM I wouldn't incur the usual ATM fees.  According to HiFX and other sources they will get you with the exchange rate instead. 

But thanks for your input, I appreciate it.

Article 17.1 of the Dounle Taxation Agreement between the US and the UK reads :-

OK it is late, the the brain is starting to tire but if I am reading that correctly 1(a) is saying that a pension is taxable only where the person lives, and not in the other state.

Then 1(b) goes on to override that and say that where the pension is exempt in the other state, it shall also be exempt in the state in which the person lives.

So as I read it, because the pension is exempt in the States it is also exempt in the UK.

$300 per hour? 3 hours? Hmmm!  It took me less than 5 minutes to access the DTA on the HMRC website, and locate Article 17.

Here is the link to the DTA ... click here.

John - I suspect in this quite unusual instance you are indeed correct because Article 17(1)(b) is not subject to the Saving Clause in Article 1(4) so it does indeed apply to a US citizen.  It would just be worth checking whether HMRC might instead think this kind of income falls within the part of the treaty covering "Government Service" instead.

There will also be foreign currency gains on each of the planned dollar withdrawals which the UK would tax as capital gains in any case. The individual concerned would still need to file UK tax returns annually claiming the benefit of the tax treaty, reporting foreign currency gains and deciding whether or not to claim the remittance basis of assessment in the UK.   

As they are both US citizens they would indeed continue to file joint US returns reporting worldwide income annually plus UK returns.

I would of thought that the US/UK Treaty would over-ride any other laws

Indeed, that is the way that DTAs work, and if that were not the case their effect would be zero!

Guya, I can't see that Article 1.4 has any effect here. After all they are resident in the UK and the UK does not tax its Citizens because of Citizenship. And as I understand it, they are not British Citizens anyway.

Government Service? Clearly not in play. Article 19.1(a) refers to :-

..... salaries, wages and other similar remuneration, other than a pension .....

-: so a specific exclusion from the definition of Government Service for pension income.

Alsatianx2, a re-read of Article 17.1 this morning, when the brain is not tired, does not alter my opinion. I think it is clear that because the pension is tax-exempt in the US it is also tax exempt in the UK .... thanks to Article 17.1(b) of the DTA.

Indeed, that is the way that DTAs work, and if that were not the case their effect would be zero!

Guya, I can't see that Article 1.4 has any effect here. After all they are resident in the UK and the UK does not tax its Citizens because of Citizenship. And as I understand it, they are not British Citizens anyway.

Government Service? Clearly not in play. Article 19.1(a) refers to :-

-: so a specific exclusion from the definition of Government Service for pension income.

Alsatianx2, a re-read of Article 17.1 this morning, when the brain is not tired, does not alter my opinion. I think it is clear that because the pension is tax-exempt in the US it is also tax exempt in the UK .... thanks to Article 17.1(b) of the DTA.

John - we must be thinking about different things...although the logic is different I roughly agree with you as I thought I previously said?

All tax treaties that the US enters into have a "saving clause".  Basically this says that with a very few exceptions the US taxes its citizens and residents (including green card holders) as if the treaty does not exist.  I am sure you agree with that, because this is the just the way all US tax treaties are written.  This is why the UK/US is rarely of much benefit to most Americans living in the UK.

I had believed that the questioner and her retired police husband are both US citizens.  Therefore the saving clause kicks in and over-rides most (but not quite all) of the UK/US tax treaty.  Luckily the specific income we are discussing is excepted from the saving clause so is only taxable by the US where there is zero tax under domestic US law (so we have been told).  This means that only the US continues to tax the income (and there is no tax there) if the questioner elects to use the treaty on a UK tax return.

There will still be taxable currency gains in the UK because the questioner will frequently be turning foreign currency into sterling.

There will still be taxable currency gains in the UK because the questioner will frequently be turning foreign currency into sterling.

Sorry if I'm butting in - but I don't understand this. If I convert sterling into foreign currency and make a gain when I convert it back, I can see that the gain would be taxable, but if you are remitting US pension payments to a UK bank account, what taxable gain is there?

Sorry if I'm being obtuse.

All tax treaties that the US enters into have a "saving clause".  Basically this says that with a very few exceptions the US taxes its citizens and residents (including green card holders) as if the treaty does not exist.  I am sure you agree with that, because this is the just the way all US tax treaties are written.  This is why the UK/US is rarely of much benefit to most Americans living in the UK.

I follow. But because Article 17 is listed in Article 1.5, the provisions of Article 1.4 are not in play here. So we are able to use Article 17.1(b) ... pension exempt from USFIT means pension also exempt from UK income tax.

Sorry if I'm butting in - but I don't understand this. If I convert sterling into foreign currency and make a gain when I convert it back, I can see that the gain would be taxable, but if you are remitting US pension payments to a UK bank account, what taxable gain is there?

Sorry if I'm being obtuse.

The UK regards foreign currency as a chargeable asset for capital gains tax purposes.

Therefore converting foreign currency such as US dollars to Sterling produces a gain or loss each time a conversion is made (comparing the value in Steling when the dollars were aquired with their value when converted).

Historically this was of little concern.  Following significant changes in the 2008 UK Finance Act to the "ordering" of remittances and the removal of the annual CGT exemption for many "non-doms" many such currency gains will now become taxable.  (In years past, this would mainly only have been a concern with larger amounts.) 

John - I suspect in this quite unusual instance you are indeed correct because Article 17(1)(b) is not subject to the Saving Clause in Article 1(4) so it does indeed apply to a US citizen.  It would just be worth checking whether HMRC might instead think this kind of income falls within the part of the treaty covering "Government Service" instead.

There will also be foreign currency gains on each of the planned dollar withdrawals which the UK would tax as capital gains in any case. The individual concerned would still need to file UK tax returns annually claiming the benefit of the tax treaty, reporting foreign currency gains and deciding whether or not to claim the remittance basis of assessment in the UK.   

As they are both US citizens they would indeed continue to file joint US returns reporting worldwide income annually plus UK returns.

I have only ever worked for an employer who did all my deductions and then just gave me paycheck every month.  My parents who were self employed at one point had an accountant and filed their own taxes but I have never done that I wouldn't know where to start.  I just figured I would go out, get a job and then DH may or may not follow suit, we would get paid and then we would file US Tax Returns declaring our worldwide income which at that point would include the UK wages.  Pardon my ignorance, I just haven't filed on my own in the UK before, I wouldn't even know where to start.  Would I need an accountant etc...

Guya, I can't see that Article 1.4 has any effect here. After all they are resident in the UK and the UK does not tax its Citizens because of Citizenship. And as I understand it, they are not British Citizens anyway.

I have dual US/UK Citizenship, DH has US Citizenship.  Our intent is to come home and eventually get DH UK Citizenship.  At that point we would both be dual citizens.

Spent my first 28yrs in the UK, last 10yrs in the US.

There will still be taxable currency gains in the UK because the questioner will frequently be turning foreign currency into sterling.

Sorry I don't mean to be ignorant, just trying to learn everything I can but what does that mean for me and DH and his money and what we will have to do?

Sorry I don't mean to be ignorant, just trying to learn everything I can but what does that mean for me and DH and his money and what we will have to do?

I would check with HMRC.