QROPS question

Not a BCE but an unauthorized charge arising due to IRA not being registered as a QROPS. Are you aware of any IRAs registered as QROPS?

OMG I have US 403b, 401a, ROTH, IRA and state and company defined benefit pension
plans. None of these are QROPs and I have no worries at all about them when I return to the UK. I will do IRS allowed rollovers and claim exemption from UK tax under the treaty. When I take income I will resource the income and pay the appropriate tax.

Who is telling you that you need to worry about QROPs. Are they a professional and have they mentioned electing the treaty treatment of the rollover?

Agree. Does this include exemptions for UK tax relieved contributions to 401k.?  My tax advisor heard from HMRC that if my 401k contains UK tax relieved contributions then a roll over to an IRA would be viewed as an unauthorized transfer unless the IRA was registered as a QROPS!!!

Agree. Does this include exemptions for UK tax relieved contributions to 401k.?  My tax advisor heard from HMRC that if my 401k contains UK tax relieved contributions then a roll over to an IRA would be viewed as an unauthorized transfer unless the IRA was registered as a QROPS!!!

Well all of my 401k contributions are free of UK tax because I'm currently working in the US.
I assume you used the treaty to defer UK tax on your 401k contributions and that you have kept to the IRS limits and not exceeded the UK limits. Did your tax advisor mention Article 18.1 of the US/UK tax treaty to HMRC or to you? That gets you around having to worry about QROPS. Take a look at page FN10 of the notes to SA-106 and you will see that under the "10% deduction" heading HMRC acknowledges that double taxation treaties can exempt certain foreign pensions from UK taxation. So you'd exempt your 401k to IRA rollover from UK tax by claiming exemption under Atricle 18.1 in the "Any other information" box. Ask your tax advisor for appropriate wording.

http://www.hmrc.gov.uk/worksheets/sa106-notes.pdf

Here's Article 18.1 of the treaty, the important bit is between the last pair of brackets.

Where an individual who is a resident of a Contracting State is a member or
beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).

Additionally Article 18.1 is exempted from the Saving Clause.

HMRC will get their tax when you take income from the IRA (assuming you stay a UK resident) as under the treaty it will be taxable in the UK. As a US citizen you'll than have to fulfill your US tax requirements, but you can use foreign tax credits.

Thanks. You have been extremely helpful.  Totally with you. Now for the home stretch.  Can you help me find documentation where the HMRC reference to "another pension scheme" under Article 18.1 includes besides another employers 401k, any IRA as well?

Can you help me find documentation where the HMRC reference to "another pension scheme" under Article 18.1 includes besides another employers 401k, any IRA as well?

Pensions are defined in Article 3.1(o) of the treaty as

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

IRAs and 401ks are specifically mentioned as being considered as pensions in the Technical explanation for Article 3.1(o)

http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

Subparagraph (o) defines the term “pension scheme” to include any plan, scheme, fund, trust or other arrangement established in a Contracting State which is generally exempt from income taxation in that State and which is operated principally to provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements. The notes provide an agreed list of existing plans qualifying as "pension schemes" in each Contracting States. In the case of the United States, the term "pension scheme" includes the following: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b) plans. 401(k) plans qualify as pension schemes because a 401(k) plan is a type of 401(a) plan. In the case of the United Kingdom, the term “pension scheme” includes the following: employment-related arrangements (other than a social security scheme) approved as retirement benefit schemes for the purposes of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and personal pension schemes approved under Chapter IV of Part XIV of that Act. The reference to entities that are operated principally to earn income for the benefit of one or more such arrangements is intended to ensure that income earned by group trusts, which invest the assets of pension schemes but do not administer pension benefits, will nevertheless qualify for benefits. The term “pension scheme” also includes any scheme identical or substantially similar to the foregoing schemes that are established pursuant to legislation introduced after the date of signature of the Convention.

Your tax advisor should be aware of all this.

Thanks very much. Most helpful!!

Thanks very much. Most helpful!!

I worry that your tax advisor did not cover all of this with you. He/she is certainly aware of the issues Guya presented and the way HMRC treats foreign pensions, but as your pensions are in the US there should have been some mention of the treaty. Are you sure your advisor knows about how US and UK tax interact through the treaty.

My tax advisor is aware of the tax treaty as well as the reluctance of IRAs to file a QROPS due to its onerous reporting requirements. He Is saying this based on a conversation he had with HMRC who feel that they have a right to treat such a transfer as an "unauthorized transfer" in view of the tax relief they had given for contributions while working in UK. I find it amazing given that there is nothing in HMRC website linking a QROPS requirement to non UK registered pensions. Any advice on way forward. Should I just pick up the phone and call HMRC? I would like to see something in writing to believe this. Thanks for your continued interest.

Why did your advisor need to talk to HMRC? Does he understand the treaty? Why didn't he set them straight? The treatment of such a rollover is well known. Did you use the treaty exemption when you made the 401k contributions? Did your tax advisor or HMRC mention Article 18.1? What is his opinion of this thread?

HMRC will generally require foreign pensions to be QROPS for you to get tax relief, but we are talking about US registered pensions covered by the treaty. I would accept HMRCs position if the saving clause applied, but it doesn't. I think HMRC and stating the UK domestic law without reference to the tax treaty. Remember most HMRC and IRS agents will not know about this esoteric area.

However, I'm an amateur at this and while I think I'm correct I'm open to correction. Your advisor is a professional so he has to make sure he is giving you the correct advice and I would be interested to hear his take on it.

Go back and read politicfool's comment as it is clear and concise. Guya is a professional and always accurate. He has given you situations where charges might apply, but you would need to have made incorrect contributions and not used the treaty. He doesn't contradict politicfool's or my opinion on this.