Retiring to the UK - California State Pension

Ok, call me paranoid, but I am just double-checking this again. (Which would make it quadruple checking?    )  Someone was kind enough to answer this question for me last year, and I cannot find the thread again.

I plan to retire soon and move to the UK. (I am a US citizen with dual EU citizenship, so it's doable.) I will have social security and a pension from the State of California (University of Cal). I have one 403B IRA, with about $30,000 in it that I plan to not touch for the time being - hopefully I can leave it there until I have to start taking minimum required deductions, which I'll deal with a few years down the road.

The U of C retirement people ~absolutely~ won't pay my pension directly to me in the UK -only to a US bank account. SSA will electronically deposit my SS to a UK bank.

I can deal with that - I'll use my Capital One credit card for most purchases and keep a US bank account to move money from.  I'll use my SS for rent, etc., there in the UK. (Until I sort out a better system.)

I am aware that only the UK will tax my SS. I've checked the personal exemption and it looks like I won't be paying much tax on SS because it will be right around the personal exemption amount.

It is my understanding, and this is what I want to quadruple-check, that my U of C pension will only be taxed in the USA.  Correct? Because it is a government pension and the tax treaty (I believe) says that payments funded by political entities, such as the State of Cal, are taxable only in the paying country?

I know about severing ties with Calif for residency purposes, so I won't be paying Cal State Income Tax (except partial year for the first year).

If I was a rich woman I wouldn't worry so much, but, while I'm not poor I will be of modest means and want to structure things so as to make the most of what funds I can control. The SS and the U of C pension will come up to just about, combined, what I bring home now after all the various deductions for insurance and pensions, etc., etc. are taken out. Enough for one person to live on decently, that. Finally.

Anyway, I know about the different tax years. I'm planning to arrive in May, so I'll basically run through one UK tax year and get an extension on my USA taxes until after I've paid anything I owe to the UK for that first UK tax year.

The current burning question is: will I owe anything to the UK on my U.C. pension?

Thanks again...

N

You can only benefit from the Treaty by electing into the Treaty; which you would do by filing an annual self-assessment tax return. The position you describe is in my experience considered aggressive by HMRC.

Why not pay UK tax on 90% of the UC pension and claim a foreign tax credit in the US? Would this cost much different? You would need (under current rules) to be registered for annual self-assessment whatever position you decide.

I would like to offer some comments on Nan D’s questions. However I would first like to clarify one matter relating to her nationality.

Nan D is a US citizen. Once she moves to the UK she will become a UK resident. However the application of one part of the UK US double tax treaty which might be of relevance (in Article 19(2)(b)) depends on whether or not she is a UK national. The treaty definition of a UK national is a British citizen. Nan D mentions that she has “dual EU citizenship” which is not a term that I recognise. Is she a British citizen?

By previous posts it looks like she is dual Irish/US. I think she put EU to differentiate that her right to live in the UK derives from EU law, not domestic British law.


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Background
It is well known that the US taxes its citizens even when they are not US residents. The tax treaty between the UK and the US has clauses dealing with the consequences of this treatment.

Savings clause
The UK US Double Tax Treaty contains a savings clause. This is contained in Article 1(4) of the treaty. This clause provides that a state may tax its citizens as if the tax treaty had not come into effect. This allows the US to continue to tax UK resident US citizens.

Limited application of the treaty
However some parts of the treaty are applied to UK resident US citizens. Article 1(5) lists those that apply. These are-
•   Four Articles, or parts of Articles, dealing with specific matters, plus
•   Two Articles dealing with the more general matters of non-discrimination and procedural matters. These are not set out in this summary.

Four Articles
The four parts of the treaty that apply to specific aspects of the taxation of UK resident US citizens are-
•   Associated Enterprises: Article 9(2).
•   Pension benefits: Article 17(1)(b), (3) and (5).
•   Pension schemes: Article 18(1) and (5).
•   Double taxation: Article 24.

Nan D’s university pension
Article 19(2) deals with pensions paid out of funds created by the US or a political subdivision or a local authority. This would appear to apply to the university pension. On this basis, the university pension would be taxable in the US and would not be taxable in the UK. However as this Article is not listed above, perhaps this does not apply. Then it would be taxable in both countries, and then double tax relief would be due. Perhaps others would comment on this.

Nan D’s social security pension
In contrast, Article 17(3), which as noted above applies to UK resident US citizens, gives the sole taxing rights on US social security pensions to the UK.

You can only benefit from the Treaty by electing into the Treaty; which you would do by filing an annual self-assessment tax return. The position you describe is in my experience considered aggressive by HMRC.

Why not pay UK tax on 90% of the UC pension and claim a foreign tax credit in the US? Would this cost much different? You would need (under current rules) to be registered for annual self-assessment whatever position you decide.

Aggressive? Meaning...? Sorry, but you've thrown me there. I just want to know what the letter of the law is. Does the treaty stipulate that I do not pay tax on my US pension to the UK, but only the USA?

If it's required, of course I'd file the appropriate forms listing my UC pension and then claim credits on my US taxes. If it's not required, why on earth would I want to go through that? (Seriously, how would it be of benefit to me to jump through the extra hoops?)

Thanks for advising on filing regardless of outcome. I had assumed I'd have to state the SS income when filing in the UK, but not the U.C. pension - assuming the treaty provides that relief.

Thanks!

N

I would like to offer some comments on Nan D’s questions. However I would first like to clarify one matter relating to her nationality.

Nan D is a US citizen. Once she moves to the UK she will become a UK resident. However the application of one part of the UK US double tax treaty which might be of relevance (in Article 19(2)(b)) depends on whether or not she is a UK national. The treaty definition of a UK national is a British citizen. Nan D mentions that she has “dual EU citizenship” which is not a term that I recognise. Is she a British citizen?

Hi. No, I am not a British citizen. It seems like most of the other cases discussed on this board deal with UK citizens returning home, or USA citizens who hold dual UK citizenship. I thought I would differentiate - did not realize it would not be clear. Thanks for writing.

In reading the treaty again, 19.2.b states that the pension would be taxable in the UK if I was both a resident and a national of the UK. Since I would only meet one of those criteria, for the time being, it appears that it is not taxable in the UK. I assume I would reference that on whatever tax forms I fill in for the UK?  - Nan

If the OP is a US/Irish citizen living in the UK then:

US will get to tax the CA pension because the OP is a US citizen.

The question is whether the OP being a non-UK citizen, but resident in the UK can avoid UK taxation on the CA pension. If they were a UK citizen I'd definitely say no, being an Irish citizen there is room for argument. It's going to depend on how HMRC judges the OPs plans and connection with the UK as to whether it will grant the Saving Clause exemption. Still I agree with Guya. Pay the tax in the UK, resource the pension by Treaty and take the FTC on the US taxes. Far simpler all round.......too many "neither and nors" in this bit of the treaty to get the brain around.

If the OP is a US/Irish citizen living in the UK then:

US will get to tax the CA pension because the OP is a US citizen.

The question is whether the OP being a non-UK citizen, but resident in the UK can avoid UK taxation on the CA pension. If they were a UK citizen I'd definitely say no, being an Irish citizen there is room for argument. Still I agree with Guya. Pay the tax in the UK, resource the pension by Treaty and take the FTC on the US taxes.

Hi Nun.  Why would being Irish figure in? (Thanks for writing!) - Nan

It's written in the treaty. A US/UK dual citizen resident in the UK gets caught in the savings clause making Article 19 moot. The US will always tax a US Government pension paid to a US citizen and the UK will tax a US Government pension paid to a UK citizen resident in the UK. Being an Irish citizen you might have an argument that Article 19 does apply to you as far as HMRC are concerned. It will depend on how they judge your UK tax residency, if you are "just passing through" you might avoid UK tax, but if you intend to stay in the UK I think you'll have a tough time avoiding UK tax......I think that's what Guya meant by "aggressive".

Read Article 1.5.b and I think you'll see that if the UK deems you to have been "admitted for permanent residence" then HMRC can tax you according to the regular UK tax rules.

Ok, so running through this with some hypothetical, but roughly close figures. (Beare with me here, please, as  numbers are not my forte.)

SSA - 10,000 pounds (give or take) covered by the personal exemption in the UK, not taxed in the USA.  U C pension - 22000 pounds a year, so at 90% I would pay UK tax on only 19,800 pounds of it at a rate of a flat 20%, for 3,960 pounds in UK tax (just under $6,000 at 1.5 exchange rate).

In the USA, my SS is not taxed if paid to me in the UK. (If I was resident in the USA, half of it would be taxed.) So I'm taxed on the equivalent of the 22,000 pounds - $33,000. With the various deductions I calculate I'd owe US taxes of about $2,580, or just over 1,700 pounds. 

So, yes, it appears that  it makes a considerable difference in what I need to budget for taxes each month. I'd pay considerably more to the UK than to the USA.  If I don't need to pay that extra amount, it matters.

It's written in the treaty. A US/UK dual citizen resident in the UK gets caught in the savings clause making Article 19 moot. The US will always tax a US Government pension paid to a US citizen and the UK will tax a US Government pension paid to a UK citizen resident in the UK. Being an Irish citizen you might have an argument that Article 19 does apply to you as far as HMRC are concerned. It will depend on how they judge your UK tax residency, if you are "just passing through" you might avoid UK tax, but if you intend to stay in the UK I think you'll have a tough time avoiding UK tax......I think that's what Guya meant by "aggressive".

Read Article 1.5.b and I think you'll see that if the UK deems you to have been "admitted for permanent residence" then HMRC can tax you according to the regular UK tax rules.

Ah, thanks. This is useful information. Initially I will be living there until my daughter gets herself through graduate school. After that, I don't know what I'll be doing - might stay, might move to another country (if I can find one that'll let me in! or if she ends up working in another country...). Everything is rather up in the air, except for about the next five or so years. I'll budget for the higher amount and see how it all falls later. Appreciate the tip!

I don't think the tax you'll pay in the UK will be that much more......but it will be more. You generally get to pay the higher of the taxes due in the US or the UK. You might want to ask HMRC about the CA pension taxation. A letter is the way to go. Or if you google you might be able to come up with an international tax geek at HMRC and email them......I've had some success doing that in the past when I wanted to find out how 457 accounts are taxed in the UK as they are not covered by the treaty.

I don't think the tax you'll pay in the UK will be that much more......but it will be more. You generally get to pay the higher of the taxes due in the US or the UK. You might want to ask HMRC about the CA pension taxation. A letter is the way to go. Or if you google you might be able to come up with an international tax geek at HMRC and email them......I've had some success doing that in the past when I wanted to find out how 457 accounts are taxed in the UK as they are not covered by the treaty.

Thanks, Nun. I'll check on that - it's always good to get things in writing! I ran the numbers on my US taxes through an online tax estimator and that's the tax I come out with (deductions for student loan interest, etc.). And if I'm at a flat 20% tax in the UK on the 90%, ... I'll try to find a UK tax estimator as well. Appreciate your help! - Nan

hi Nan,
    We pay UK tax on my husband's UC pension.  This was quite a long and difficult discussion with HMRC, but eventually this was the ruling.  HMRC asked us for detailed information about the pension, and their decision seems to have been that since UC pensions are paid by the Regents of the University, not the State of California, it does not count as a government pension.