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

Has anyone seen the research that resulted in the < / > 50% employer/employee contribution to determine whether an account is considered a foreign grantor trust?

Would it not be the case that the underlying corporate form (i.e,. corporation, trust, etc) determine whether the account is a FGT (not the contribution percentages)? 

I haven't. But you'll get as many opinions as advisors.

If I had a SIPP I'd just treat it as a pension under the treaty. Some professionals will say that is just wrong and others will say it is a reasonable approach. Whatever way you go you need to know what you are doing and why.

The law on the 50% test is not new nor unclear when one is dealing with a non-exempt employees' trust. The IRS explained on page 4 here  http://www.irs.gov/pub/lanoa/pmta00173_6973.pdf back in 1997:

"Section 402(b) (3) provides that a beneficiary of any trust described in § 402(b) (1) is not considered the owner of any portion of the trust under subpart E of part I of subchapter J. Section 1.402(b)- l(b) (6) of the regulations provides that where contributions made by the employee are not incidental when compared to contributions made by the employer, the beneficiary shall be considered to be the owner of the portion of the trust attributable to contributions made by the employee, if the applicable requirements of subpart E, part I, subchapter J, chapter I of the Code are satisfied. For purposes of this rule, contributions made by an employee are not incidental when compared to contributions made by the employer if the employee's total contributions as of any date exceed the employer's total contributions on behalf of the employee as of that date."

A SIPP is however not necessarily an employees' trust so unless it is, I concur that it is dangerous to read this rule into any vehicle that is not within 402(b) in the first place. If I read correctly and in a spirit of fairness what Buzzacott were saying, I think it reads that one either has met the 50% test explained above by the IRS - or one has not - in which case one is more likely than not to have a foreign grantor trust.

A SIPP is however not necessarily an employees' trust so unless it is, I concur that it is dangerous to read this rule into any vehicle that is not within 402(b) in the first place.

I'm confused as to how a SIPP could ever be an employees' trust. It's an entirely personal account, analogous to an IRA, and normally has nothing to do with the employer/employee relationship. Can you explain?

The memo is very interesting for other reasons though - so thanks for sharing.

I'm confused as to how a SIPP could ever be an employees' trust. It's an entirely personal account, analogous to an IRA, and normally has nothing to do with the employer/employee relationship. Can you explain?

The memo is very interesting for other reasons though - so thanks for sharing.

For Articles that are exempted from the Saving Clause I'd just use the Article 3.1(o) definition

o) the term “pension scheme” means any plan, scheme, fund, trust or other
arrangement established in a Contracting State which is:
(i) generally exempt from income taxation in that State; and
(ii) operated principally to administer or provide pension or retirement
benefits or to earn income for the benefit of one or more such arrangements.

and say that a SIPP is a pension.

For Articles that are exempted from the Saving Clause I'd just use the Article 3.1(o) definition

and say that a SIPP is a pension.

Yes, I completely agree with nun and have advocated this position elsewhere.

My point (in response to the line of analysis put forward by guya) was that even if the treaty did not apply, a SIPP could not be an employees' trust since it has absolutely nothing to do with employment, so there doesn't seem to be any support whatsoever for the notion that the 50% rule could possibly be relevant to SIPPs.

I am glad that we agree that most SIPPs are not within 402(b).

As by definition they are not going to be US qualified pensions, they are not pensions at all under domestic US law.

This leaves open the likelihood that under US domestic law many therefore be foreign grantor trusts requiring filing of 3520-A by the trustee and 3520 by the beneficiary.

I am glad that we agree that most SIPPs are not within 402(b).

As by definition they are not going to be US qualified pensions, they are not pensions at all under domestic US law.

This leaves open the likelihood that under US domestic law many therefore be foreign grantor trusts requiring filing of 3520-A by the trustee and 3520 by the beneficiary.

The key words here are "under US domestic law". It's important for any lay people reading this to be aware that unless the saving clause applies, the treaty overrules both US and UK domestic law in areas where they overlap. Nun has helpfully cited the treaty language stating unambiguously that SIPPs are covered as pensions for treaty purposes and that the saving clause does not apply.

Sadly many professionals (not saying you're one of them!) advise their clients based exclusively on how SIPPs are viewed under US law, without also presenting any information on the treaty benefits available for SIPPs. This is irresponsible in my opinion. To debate whether it's better to make a treaty claim or not is entirely legitimate, but to ignore the treaty entirely does a disservice to clients' interests.

It may be correct that the treaty can override the way that the SIPP is taxed in the US, but it does not change the nature of the SIPP itself.  If the SIPP is a trust for U.S. tax purposes, the treaty will not transform it into another type of entity.  Forms 3520 and 3520-A are required to be filed with respect to certain foreign trusts and their U.S. beneficiaries.  Code §6048.  Even if the benefits of the treaty are claimed with respect to the way that the SIPP is taxed in the U.S., I believe that the Forms 3520 and 3520-A would still be required to be filed annually.

I'd take the path of least resistance. I'd claim treaty rights and treat the SIPP as a pension. I would not file any trust forms or PFIC forms. Some professionals will insist on foreign trust and PFIC filing because of the possible penalties and their requirement to CYA with the most conservative interpretation of the law. Other professionals (and many amateurs doing their own taxes and the IRS at the US Embassy) will say a SIPP is a pension not requiring the 3520 and PFIC filing just FBAR and 8938 where applicable. This is all interpretation and maybe someone should get an IRS ruling.

I'd file and wait for the IRS to get back to me with any questions. Whether I file the trust forms or not will not change the tax due. If the IRS tells me I should have filed a 3520 I'll say sorry as my understanding is that one is not required for UK pensions.

I have the advantage of not being a professional and so don't have any fiduciary responsibilities. I'm going to do my taxes in a sensible way that complies with the law to the best of my understanding.

Here is a very relevant report of how the IRS folks at the Embassy see UK pensions plans

http://talk.uk-yankee.com/index.php?topic=81730.msg1094430#msg1094430

It may be correct that the treaty can override the way that the SIPP is taxed in the US, but it does not change the nature of the SIPP itself.  If the SIPP is a trust for U.S. tax purposes, the treaty will not transform it into another type of entity.  Forms 3520 and 3520-A are required to be filed with respect to certain foreign trusts and their U.S. beneficiaries.  Code §6048.  Even if the benefits of the treaty are claimed with respect to the way that the SIPP is taxed in the U.S., I believe that the Forms 3520 and 3520-A would still be required to be filed annually.

Would you also advocate PFIC filing?

I would note that Code §1298(a)(3) provides that "stock owned, directly or indirectly, by * * * a trust shall be considered as being owned proportionately by its * * * beneficiaries."

Thus, it would appear that Form 8621 would be required.  However, there appears to be little or no monetary penalty for failing to file Form 8621.  Although the statute of limitations for that year would remain open.

I would note that Code §1298(a)(3) provides that "stock owned, directly or indirectly, by * * * a trust shall be considered as being owned proportionately by its * * * beneficiaries."

Thus, it would appear that Form 8621 would be required.  However, there appears to be little or no monetary penalty for failing to file Form 8621.  Although the statute of limitations for that year would remain open.

Having to file PFIC for the funds held within a UK pension would be a difficult task. Just getting all the right numbers to elect QEF might be almost impossible. Would you just do M2M and then claim the treaty exemption from tax?

So in this scenario the treaty allows for tax deferral, but still requires all the difficult tedious and ultimately useless reporting forms. This is not the stance taken by the IRS office at the US Embassy and it would be interesting to hear of cases where failing to file a foreign trust form or PFIC for a UK personal or employer defined contribution plan has caused problems and fines. This approach is also advised by Thun Financial Advisors. This is just some post on the web so it could be wrong, but I quote it to show that professionals can disagree in this area.

http://thunfinancial.com/american-expat-pfic-uk-non-reporting-fund-investment-trap-article/

A Note on Funds Held Within an Qualified Retirement Plan

Many Americans resident in the United Kingdom will be wondering how this affects investments held in either U.S. or UK retirement accounts, such U.S. IRAs or 401ks or UK SIPPs. Fortunately, the United States and the United Kingdom have a double taxation treaty that provides for the mutual recognition of each other’s system of tax deferred retirement accounts and pension plans. Because assets in these accounts are subject to a separate set of tax rules in both the United States and the United Kingdom, none of the rules regarding either PFICs or “non-reporting” funds apply if the funds in question are held inside a qualified retirement account. Therefore, a U.S. citizen building up a retirement nest egg through a UK employer provided pension plan does not have to be concerned that the investments in the plan are PFICs. Likewise, if the same U.S. investor is contributing to a U.S. 401k, he or she does not have to worry that the investments in the 401k, or an old inactive 401k are “non-reporting” funds. It does not matter. All those rules are overridden by the rules regarding taxation of withdrawals from these specific kinds of retirement accounts.
- See more at: http://thunfinancial.com/american-expat-pfic-uk-non-reporting-fund-investment-trap-article/#sthash.TgQf2lKJ.dpuf

Here is an excellent answer from Deloitte about the US tax treatment of UK pensions. It's clear and puts the familiar professional opinion. It's interesting that the article never states that a UK personal pension is at "foreign grantor trust" or that PFIC will be an issue. The only firm advice is to file FBAR and 8938 and also that the treaty can be used for deferral of tax. I would love to read a professional analysis of the situation that is a little more definite. It seems strange that in the areas where the professionals are not sure they have not sought out an IRS ruling.

http://www.spearswms.com/expert-advice/what-do-pfic-rules-mean-for-my-pension#.UxYCMd2R6ek

More excellent information about US and UK pensions

http://www.londonandcapital.com/news-and-insight/thought-leadership/us-team/uk-pensions-explained-in-relation-to-us-citizens-living-in-uk.html