US/UK taxation of UK Personal Pension Plans (SIPPs and Stakeholder Pensions)

OK so I know this one is going to get nasty. I haven't looked into this much as I'll never own a UK Personal Pension Plan. So to start this discussion off I'll quote Lizzit of British American Tax who is a tax professional who has lots of great advice.

http://www.taxalmanac.org/index.php/Discussion:US_taxation_of_UK_Stakeholder_Pension_/_SIPP

The core of her comments are

1) UK SIPPs and Stakeholder Pensions are the same type of animal to the US. There is no appreciable difference for US tax purposes.
2) Dual product advisors, dual qualified accountants, and dual practice tax lawyers disagree a lot. You won't find any two (who have done the research themselves) having the same opinion. Thus, it's down to you to either (a) do your own research or (b) pay one of the others to provide their research supporting the position you'd like to take.
3) Like others on this site, I charge a fee for the backround research that supports the position my company takes.
4) My position is that you may either (a) make a treaty claim under Article 18 to exempt the contributions and growth from US tax or (b) not make a claim.
4a) If you make a claim, you get current year tax break in the US on the money contributed. All growth is US tax-free. There are no trust form filing requirements on an arising basis. When you take the money out, you pay tax at income tax rates the same as any stateside pension.
4b) If you don't make a claim, you pay tax now at your current US tax rate on the contributions, albiet at an effective rate of zero due to higher UK tax rates. The growth is taxable. Two schools of thought on this, one is to compute the income, capital gains, and PFIC tax on the basket of goodies annually. The other is to tax the whole shebang on a mark to market basis. I usually opt for the M2M each year, but I do the basket method when the data can be made available. There are STILL no trust form filing requirements on an arising basis. When you take the money out, you have a fully tax-free basis in the fund and therefore the basis is US tax-free.
5) You can switch back and forth year to year from making a claim to not making a claim.
6) I must reiterate this is the results of my research and that other people in the dual US/UK industry tend to be relying on the research of a single law firm here in the UK.

that should get the ball rolling.

I'll put my 50 cents in here...

My understanding of the tax treaty and subsequent amendments is that any gains etc grow tax deferred, you have to do nothing annually until a distribution is made, (except FBAR and 8938 if applicable). The important thing to remember is that the fund you invest in must be a tax deferred and you receive no gain or distribution from it in that year. No different from a Stateside IRA, where you can invest in fund x y or z as a retirement account  and just get a 5498. If you invest in x y or z as a mutual fund and get a 1099, then it's not a retirement  account. If the U.K refer to the account as a retirement pension plan, then the U.S will honor that. Conversely HMRC consider an IRA,(ROTH), 401(k) etc to be qualified. Invest in x y or z in a mutual fund and watch out! You have some not so nice reporting to do with HMRC. At the end of the day, it's a reciprocal agreement. You can also deduct your U.K personal pension contribution on your U.S tax return, HMRC will also give tax relief at source.

I'd rather we kept on the UK Personal Pension Plan (PPP) topic to keep things relatively clear.

The UK taxation of PPPs is easy; tax deferred contributions and growth until distributions are made. However, how will the US tax them. If they qualify as a pension under the UK/US Treaty the you can use Articles 17 and 18 so your contributions and gain will also be US tax deferred until you take income out. If not then the contributions will be US taxable and so will any any gains. The next question would the be, "are you accounts a foreign trust or PFIC"?

To clarify, Proving your pension is covered under Chapter 1 of Part XIV, or Part XIV  of the Income and Corporation Taxes Act of 1988, then you're fine. I would not consider a qulified PPP to be a PFIC or trust. HMRC would have to consider the same of an IRA, which I don't belive they do, unless anyone files foreign trust/PFIC equvilent forms with HMRC in respect to their Stateside retirenment account?

Article 18 of the Tax Treaty deals with cross-border pension contributions and is generally intended to remove barriers to the flow of personal services (i.e., employees) that could otherwise result from differences in the US and UK laws regarding the deductibility of pension contributions. This is the first US tax treaty to allow US citizens residing in another country to deduct, for US tax purposes, contributions made to a foreign pension plan.

US Citizens Residing in the UK and Participating in a UK Pension Plan. The Tax Treaty allows US citizens resident in the UK to deduct, for US tax purposes, contributions to a pension plan established in the U.K. This deduction is only available while the US citizen continues to reside in the UK. The US citizen’s deduction is limited to the lesser of (1) the amount deductible in the UK for contributions and benefits under a UK-established pension scheme and (2) the amount that would be deductible in the US for contributions and benefits to a generally “corresponding pension scheme” established in the US. In addition, US citizens will not be taxed by the US as the pension benefit accrues, provided the UK-established pension scheme is a generally “corresponding pension scheme” (as described below).

Corresponding Pension Schemes. The Notes to the Tax Treaty state that “corresponding pension schemes” include:

In the UK: (1) Approved employment-related retirement benefit schemes (for purposes of Chapter 1 of Part XIV of the Income and Corporation Taxes Act of 1988) and (2) Personal pension schemes approved under Chapter IV of Part XIV of such Act).

In the US: (1) Qualified plans under IRC § 401(a), e.g., 401(k) plans, (2) Individual Retirement Accounts (including traditional, SEP and Roth IRAs) and (3) Qualified plans under IRC § 403(a) and (b).

I tend to agree with you. However, I'm not a tax professional so all I'm going by is my reading of the treaty and I haven't seen a memo from the IRS that backs up the ample common sense of your post, but there is this very non-comittal memo from the IRS

http://www.irs.gov/pub/irs-wd/10-0151.pdf

My question is whether SIPPS and stakeholder pensions are covered in the UK Govt. act you mention as they were introduce in 2001 and whether there has been an actual test case to see if the IRS recognizes them as pensions even though we all know that they are.

To clarify, Proving your pension is covered under Chapter 1 of Part XIV, or Part XIV  of the Income and Corporation Taxes Act of 1988, then you're fine. I would not consider a qulified PPP to be a PFIC or trust. HMRC would have to consider the same of an IRA, which I don't belive they do, unless anyone files foreign trust/PFIC equvilent forms with HMRC in respect to their Stateside retirenment account?

Article 18 of the Tax Treaty deals with cross-border pension contributions and is generally intended to remove barriers to the flow of personal services (i.e., employees) that could otherwise result from differences in the US and UK laws regarding the deductibility of pension contributions. This is the first US tax treaty to allow US citizens residing in another country to deduct, for US tax purposes, contributions made to a foreign pension plan.

US Citizens Residing in the UK and Participating in a UK Pension Plan. The Tax Treaty allows US citizens resident in the UK to deduct, for US tax purposes, contributions to a pension plan established in the U.K. This deduction is only available while the US citizen continues to reside in the UK. The US citizen’s deduction is limited to the lesser of (1) the amount deductible in the UK for contributions and benefits under a UK-established pension scheme and (2) the amount that would be deductible in the US for contributions and benefits to a generally “corresponding pension scheme” established in the US. In addition, US citizens will not be taxed by the US as the pension benefit accrues, provided the UK-established pension scheme is a generally “corresponding pension scheme” (as described below).

Corresponding Pension Schemes. The Notes to the Tax Treaty state that “corresponding pension schemes” include:

In the UK: (1) Approved employment-related retirement benefit schemes (for purposes of Chapter 1 of Part XIV of the Income and Corporation Taxes Act of 1988) and (2) Personal pension schemes approved under Chapter IV of Part XIV of such Act).

In the US: (1) Qualified plans under IRC § 401(a), e.g., 401(k) plans, (2) Individual Retirement Accounts (including traditional, SEP and Roth IRAs) and (3) Qualified plans under IRC § 403(a) and (b).

I think there's an important detail that's been missed; the Notes to the Tax Treaty also state that:

"Paragraph 5 generally provides U.S. tax treatment for certain contributions by or on behalf of U.S. citizens resident in the United Kingdom to pension schemes established in the United Kingdom that is comparable to the treatment that would be provided for contributions to U.S. schemes. Under subparagraph (a) of paragraph 5, a U.S. citizen resident in the United Kingdom may exclude or deduct for U.S. tax purposes certain contributions to a pension scheme established in the United Kingdom. Qualifying contributions generally include contributions made during the period the U.S. citizen exercises an employment in the United Kingdom if expenses of the employment are borne by a U.K. employer or U.K. permanent establishment. Similarly, with respect to the U.S. citizen’s participation in the U.K. pension scheme, accrued benefits and contributions during that period generally are not treated as taxable income in the United States.

...

Under subparagraph (d), paragraph 5 does not apply to pension contributions and benefits unless the competent authority of the United States has agreed that the pension scheme established in the United Kingdom generally corresponds to a pension scheme established in the United States. The notes provide that certain pension schemes have been determined to "generally correspond" to schemes in the other country. Since paragraph 5 applies only with respect to persons employed by a U.K. employer or U.K. permanent establishment, however, the relevant U.K. plans are those that correspond to employer plans in the United States. Accordingly, it applies with respect to retirement benefit schemes for the purpose of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988."

The only tax treaty benefit available with a SIPP is that if you move back to the US, the IRS can't tax the gains within your SIPP until you take a distribution. This is discussed in Paragraph 2 and also applies to employer pension schemes.

However I feel it is pretty clear that for the US citizen living in the UK, the IRS will only allow them to deduct contributions to an employer pension, not to a SIPP.

I'm not a tax professional though, so I'd be curious to hear if the pros have read the section above and arrived at a different conclusion.

I believe the treaty had been updated in 2005 to reflect pensions under Chapter IV of Part XIV (Income and Corporation Taxes Act of 1988). Just my interpretation, would be good to hear how the professional would handle this though

I believe the treaty had been updated in 2005 to reflect pensions under Chapter IV of Part XIV (Income and Corporation Taxes Act of 1988). Just my interpretation, would be good to hear how the professional would handle this though

The latest version of the treaty posted on both the IRS and HMRC websites is dated 2001. Quite possible it could have been revised though. Do you know where the revision could be found?

This is my source:

http://www.irs.gov/pub/irs-utl/competent_authority.pdf

This shows more countries:

http://www.irs.gov/businesses/small/international/article/0,,id=137376,00.html

This is my source.

http://www.irs.gov/pub/irs-utl/competent_authority.pdf

I could be reading it wrong, but I think that's referring to a totally different part of the tax treaty, and may not be relevant to Article 18, where the pension issues that affect most of us are discussed - thoughts?

I knew this would get nasty

To all the good folks above,

Don't forget the other side of the equation: what happens when you start claiming the benefits from pension plans. Will the plan be a qualified plan for the purposes of line 16, form 1040, resulting in the use of the simplified method? If not, the use of the General Rule as found in Publication 939 with its various worksheets and reams of actuarial tables will be required to determine your allowable costs in the plan. More allowable costs reduce the taxable income generated by the pension. The unknown: will the rules be the same in 10, 20, or 30 years when you start receiving the benefits? Can/will the plan be allowable under either of the methods?

Will the plan be a qualified plan for the purposes of line 16, form 1040, resulting in the use of the simplified method? If not, the use of the General Rule as found in Publication 939 with its various worksheets and reams of actuarial tables will be required to determine your allowable costs in the plan. More allowable costs reduce the taxable income generated by the pension. The unknown: will the rules be the same in 10, 20, or 30 years when you start receiving the benefits? Can/will the plan be allowable under either of the methods?

This is why I linked to this

http://www.irs.gov/pub/irs-wd/10-0151.pdf

The IRS are very non-committal on the status of the SIPP

This from the professionals

http://www.buzzacott.co.uk/insights/how-us-citizens-can-make-the-most-of-uk-pensions-changes/34

The SIPP section is reproduced here

When is a pension not a pension?

Provided employer contributions to a UK employer plan represent at least 50% of total contributions, then investment growth within the pension is protected from UK and US tax until withdrawn. This is under the terms of the UK/US double tax treaty and there are no additional reporting requirements.

However, if you personally contribute more than 50% of the overall contributions to a personal pension or a SIPP, generally the fund is treated as a foreign grantor trust for US tax purposes. This means that you are required to submit forms 3520 and 3520-A each year.

Strictly, the realised income and gains generated within such a plan should be taxed on your US return, as with any other grantor trust arrangement. However there is wording in the US treasury explanation to the treaty that anticipates situations like this and says that the growth is not taxed. Taking advantage of the explanatory wording in the notes provides an opportunity to widen the investment mandate in some cases.

Politicfool and Buzzacotts agree.

It would be interesting to know how many people fall into into the above and submit 3520 & 3520-A.