HMRC forms to claim tax exemption from gains in US pensions

There has been much discussion as to how UK pensions are taxed by the IRS both before and after retirement income is taken. However, how would a US/UK dual citizen who is resident, ordinarily resident and domiciled in the UK be taxed by HMRC on the gains inside a US based IRA, 401k, 401a, 403b or 457 plan?

It would seem that the treaty allows for gains inside IRAs, 401k, 401a and 403b to be sheltered from UK taxation and that UK tax would only be due when income is taken from the accounts. Is there an HMRC form to claim this exemption?, do you just write a letter describing the funds and claiming treaty exemption? or do you do nothing until you start taking income from the accounts?

Then there's the 457 plan. This is a US non-qualified deferred compensation retirement plan and is not specifically mentioned in the treaty. How would HMRC deal with the gains inside that?

> Is there an HMRC form to claim this exemption?, do you just write a letter describing the funds and claiming treaty exemption? or do you do nothing until you start taking income from the accounts?

No special form. In the UK, people tend to think they need complete a Tax Return only when they are sent one by HMRC, which is incorrect. Under UK self assessment one notifies HMRC if there is a liability/claim. For that reason one needs to compute one's tax position every year and if there's more than a minor amount due/claimed, put in a Return. In your case you would put a note on your annual tax return to identify the nature of the income/gains which you are not including and why (e.g. "gains and income in US qualified scheme not taxable under DTT").

> Then there's the 457 plan. This is a US non-qualified deferred compensation retirement plan and is not specifically mentioned in the treaty. How would HMRC deal with the gains inside that?

They are having difficulty with deferred compensation and there are discussions now happening. The broad UK rule is that compensation is taxable when one has a right to it. When I say 'broad' you will understand I know that in every case one has to look at the documentation and there are no quick answers.  One hopes that the 457 scheme in question gives that right while you are not UK resident, because if it gives it after, then at first sight, one has a problem. Let us say that the scheme delivers that right while you are not UK resident - and then you become so, how will the accrued income and gains be taxed? Interestingly, as they are remitted to the UK if you are not UK domiciled, and as they arise if you are. You say you have dual citizenship - not the same as you know as domicile. Gains tax will be assessed on gains since purchase, not since arrival in the UK. There's not much I can add without seeing the documentation but at the moment if you want to minimise global tax perhaps you would work on trying to convert it to income from a US qualifying plan before you arrive in order to obtain the 10% tax free element on that part of the pension annuity that is above basis (the rest, one intends, not taxed in the UK or the US).
At my firm, we request clients to read a book and then have four meetings to sort out everything they need to know before retiring, and two of our meetings deal with above kind of question.

In your case you would put a note on your annual tax return to identify the nature of the income/gains which you are not including and why (e.g. "gains and income in US qualified scheme not taxable under DTT").

Thanks. Yes that's what I was thinking too. When I return I'll talk with HMRC about what they exactly require.

> Then there's the 457 plan. This is a US non-qualified deferred compensation retirement plan and is not specifically mentioned in the treaty. How would HMRC deal with the gains inside that?

They are having difficulty with deferred compensation and there are discussions now happening. The broad UK rule is that compensation is taxable when one has a right to it. When I say 'broad' you will understand I know that in every case one has to look at the documentation and there are no quick answers.  One hopes that the 457 scheme in question gives that right while you are not UK resident, because if it gives it after, then at first sight, one has a problem. Let us say that the scheme delivers that right while you are not UK resident - and then you become so, how will the accrued income and gains be taxed? Interestingly, as they are remitted to the UK if you are not UK domiciled, and as they arise if you are. You say you have dual citizenship - not the same as you know as domicile. Gains tax will be assessed on gains since purchase, not since arrival in the UK. There's not much I can add without seeing the documentation but at the moment if you want to minimise global tax perhaps you would work on trying to convert it to income from a US qualifying plan before you arrive in order to obtain the 10% tax free element on that part of the pension annuity that is above basis (the rest, one intends, not taxed in the UK or the US).
At my firm, we request clients to read a book and then have four meetings to sort out everything they need to know before retiring, and two of our meetings deal with above kind of question.

My 457 plan allows for me to take US taxable income from it without penalty after I leave my current job. The advantage of the 457 over other tax deferred accounts is the ability to take income from it before 59.5 without the 10% penalty. However, as you suggest, before I return to the UK I think I'll roll the 457 over into an IRA so that there'll be no argument about the UK status of any US tax deferred gains. If I want to access the money before 59.5 without doing a US 72t or having a 10% penalty I'll rollover from the IRA into my ROTH IRA and take out a similar amount of money that was previous years' regular ROTH contributions. I'll pay income tax in US and UK on the rollover, but the ROTH distribution will be US and UK tax free.