HMRC vs IRS treatment of UK pensions

Here's another salvo in ongoing UK personal pension and US taxation debate.

Reading the US-Individual-2002 form HMRC obviously considers UK personal pensions to be covered by the DT convention as it says

2. Purpose of form US-Individual 2002
Form US-Individual 2002 enables you as a resident of the United States to apply under the UK/USA/Double Taxation Convention (SI 2002 Number 2848 which, for taxes withheld at source, took effect on I May 2003), for relief at source from UK income tax on UK-source pensions, (including personal pensions and the State Pension), incapacity benefit, purchased annuities, royalties and interest. You may use the form to claim relief in respect of any other income qualifying under Article 22 of the Convention – the ‘Other Income’ article. It also provides for a claim to repayment of
UK income tax in cases where payments of the income have been made with UK tax deducted.

So if you are US resident, your UK personal pension distributions will be free of UK income tax according to HMRC.

The popular US interpretation is that many UK personal pension plans must be dealt with as foreign grantor trusts and all the required forms filled, but I have also read that there is language in the treaty explanatory notes that exempts such trusts from tax on any gains until distributions are made. I would love it if anyone can point me to that paragraph by the way. This would mean that the only burden in owning a UK personal pension is the paperwork and the potential fines associated with getting it wrong.

Thx Nun for posting this..as you know from previous posts of mine, this is of interest to me and it's very clear now that not only do you have to find the right advisor who has knowledge on both sides of the Pond but who is able to disable all the grey areas and work for the client as opposed to simply say.."although it's unclear, we will put it down as a trust as see what happens".........this person needs to be on the ball, know immediately how to fill out the forms correctly and have IRS/HMRC contacts......thx for all your good work and keep me(us) posted...
Cheers...Bran

Please keep us posted about your progress. I would like to see the treaty broadly applied to UK pensions with the resulting decrease in required forms and worry for the average tax payer. This is a position taken by only a few tax professionals, but it would make our lives far simpler and reduce our reliance on them.

Again this is all really just a matter of jumping through IRS hoops to avoid penalties, as I have read that even UK pensions that are deemed reportable as foreign grantor trusts are exempt from US tax on gains.

For US citizens with UK pensions the planning can become more complicated as it's advantageous for them to use FTC to offset US tax when they make contributions to build up a tax free basis. Then when they return to the US they take distributions and use the treaty to exempt the income from UK taxation and just pay 15% capital gains on the gain in the US.

"Then when they return to the US they take distributions"

Just to clarify your above comment............what do you mean by "when they return to the US"......In my case, being a dual citizen but permanent Resident here, I wouldn't be returning? Thx.

Forgot to ask you Nun, what does FTC stand for......probably a stupid question..just can't think now..its late(well thats my excuse)
Thx.

FTC = Foreign Tax Credit.

When I mentioned returning I was thinking about americans who work in the UK for some time and save in UK pensions with the plan to return to the US. Many people who work for large firms or have high net worth get their taxes done by professionals who implement these strategies (for a fee). If they retire in the UK these strategies aren't appropriate.