Should I file tax - I've never lived in the US and I have no assets in the US

So, as I said above, except that claiming the US FTCs requires re-sourcing?

Yes for non government pensions that's the way to do it.

For a US Government pension paid to a US citizen the saving clause always applies so it's always taxed by the US. The question I have is how and indeed whether the saving clause is applied by HMRC as that will determine the UK tax on a US Government pension when it's paid to someone in the UK.

I read Article 1.5.b to say that the saving clause does not apply to Article 19 only when the payment is made to some one who is neither a citizen nor a permanent resident. So for a US citizen living temporarily in the UK and getting a US Government pension Article 19 does not apply for the IRS and they are taxed by the US, but for HMRC Article 19 comes into play and there would be no UK tax. However if the US citizen is a UK permanent resident, maybe that means some one with ILR, then the saving clause would apply for HMRC because the "neither a citizen, nor a permanent resident" condition for it to not apply is not met. So both HMRC and IRS can tax the pension an I believe that HMRC should be paid first and the FTC taken on the US tax return. This all depends on HMRCs interpretation of "permanent reaident" and whether it even bothers with the saving clause.


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Confusing or what!

UK Guidance on Article 24 says:

A major change from the old agreement in Article 24(6)(b) provides that the UK will not provide relief for the US tax imposed on its citizens resident in the UK, if that tax is solely charged in accordance with the “saving clause” in Article 1(4).  As a consequence, Article 24(6)(c) eliminates the potential for double taxation that can arise by providing that the US will credit the income tax paid or accrued to the United Kingdom, after the application of Article 24(6)(b). It further provides that in allowing the credit, the US will not reduce its tax below the amount that is taken into account in the U K in applying Article 24(6)(b). This will mean, for instance:

* that the UK will no longer give relief for US tax paid in respect of US work days by US citizens, working for UK employers. Rather, the US will give relief for UK tax;

* that US citizens will be able to claim a exemption under Article 1 4(2) in the same way as a UK resident who is not a US citizen can providing that all the requirements set out in the paragraph are fulfilled.

http://www.hmrc.gov.uk/manuals/dtmanual/DT19886.htm

That seems to confirm that as far as the UK is concerned, in the case of a pension paid by a government, Article 19 always applies. 

Article 19 says a pension paid to a UK resident by (in this instance) the USG, is taxed only in the US - unless the recipient is a UK national, in which case it's taxed only in the UK.

If that's how it works, does that mean the US would not withhold, in the case of a UK national, I wonder?  Or would the recipient have to pay both governments and then wait for the IRS refund?

Confusing or what!

UK Guidance on Article 24 says:http://www.hmrc.gov.uk/manuals/dtmanual/DT19886.htm

That seems to confirm that as far as the UK is concerned, in the case of a pension paid by a government, Article 19 always applies. 

Article 19 says a pension paid to a UK resident by (in this instance) the USG, is taxed only in the US - unless the recipient is a UK national, in which case it's taxed only in the UK.

If that's how it works, does that mean the US would not withhold, in the case of a UK national, I wonder?  Or would the recipient have to pay both governments and then wait for the IRS refund?

I think you need to look at Article 1.5.b closely. Article 24 is just detailing how FTC can be applied.

A UK citizen living in the UK and getting a US Government pension would have no US tax to pay...it would only be taxable in the UK. In this case the saving clause does not apply for the IRS and Article 19 is applied for the US tax.......so no US tax and no withholding which could be claimed by filing an W-8BEN. If the UK citizen was a US citizen too then tax has to be paid in the US and the UK, but the FTCs must be applied for on the US tax return. The question still remains whether HMRC will tax the US Government pension when paid to a UK permanent resident who is not a UK citizen......I think they should.

A UK citizen living in the UK and getting a US Government pension would have no US tax to pay...it would only be taxable in the UK. In this case the saving clause does not apply for the IRS and Article 19 is applied for the US tax.......so no US tax and no withholding which could be claimed by filing an W-8BEN.

Yes, agreed, if the recipient has UK citizenship only, Article 19 applies and the pension is UK-taxable.  Not sure about the withholding - wouldn't the paying body need confirmation of the recipient's citizenship status (by way of the form you mention, perhaps), in order not to be required to withhold?

If the UK citizen was a US citizen too then tax has to be paid in the US and the UK, but the FTCs must be applied for on the US tax return.

. 

Agreed - a dual would probably have to pay both the UK and the US, and wait for the US tax to be refunded. 

The question still remains whether HMRC will tax the US Government pension when paid to a UK permanent resident who is not a UK citizen......I think they should.

I think the Guidance makes it clear that the UK will apply Article 19, which gives taxing rights to the source country (the US) unless the recipient is both a UK resident and a UK national. 

This is probably why the military retirees don't have any problem claiming exemption under Article 19 - bet none of them would dream of applying for UK citizenship!   

So to summarize (as I see it)

Dual citizen - pay both and claim refund from the US.
US citizen only - pay US only (via withholding)
UK national only - pay UK only.

Thanks for your comments.

This is probably why the military retirees don't have any problem claiming exemption under Article 19 - bet none of them would dream of applying for UK citizenship!   

And DT19876 confirms:

Pensions paid by the United States government to former members of the US armed forces (or to their surviving spouses or dependent children) in respect of their period of service continue to regarded as paid for services rendered to the United States. Such pensions therefore come within Article 19 (Government Service) of the agreement and are exempt from United Kingdom tax unless, exceptionally, the recipient is both a national and a resident of the United Kingdom in which case the pension is taxable only in the United Kingdom

The HMRC and USAF documentation of the fact that HMRC does not tax US Government pensions when paid to US citizens living in the UK is why I believe that the UK does not use the saving clause; it's something that is put in by the US because of CBT. If HMRC were to apply the saving clause a US Government pension would be UK taxable when paid to a UK permanent resident.

So that leaves the question as to whether HMRC will tax a US Government pension when paid to a non-US and non-UK citizen resident in the UK. Using the logic that HMRC does not use the saving clause it would only be taxable in the US and not in the UK.

... the UK does not use the saving clause; it's something that is put in by the US because of CBT.

Exactly.  :-)

Also evident from the fact that the UK has gazillions of Double Taxation Treaties with other countries, in which the wretched Saving Clause does not appear.

So that leaves the question as to whether HMRC will tax a US Government pension when paid to a non-US and non-UK citizen resident in the UK. Using the logic that HMRC does not use the saving clause it would only be taxable in the US and not in the UK.

Hmmm.  Yes, presumably,  provided the recipient is not a UK national and if there's nothing in US or UK treaties with the recipient's countr(y)(ies) of citizenship to alter that.

This is from the US-Individual 2002

Government service
If you receive a pension paid by the UK for service to the UK Government or a local authority, there are special provisions in the UK/USA Double Taxation Convention. Your pension from that employment will be exempt from UK tax only if you are a United States national as well as being resident there.

This is an application of Article 19. The use of the savings clause when it relates to CBT is obviously a non-sequitur for UK taxation, but it would seem sensible to apply for UK residents.

This is from the US-Individual 2002

This is an application of Article 19. The use of the savings clause when it relates to CBT is obviously a non-sequitur for UK taxation, but it would seem sensible to apply for UK residents.

How do you mean?

How do you mean?

Well the UK does not tax based on citizenship....just on residency and source of the income.

Well the UK does not tax based on citizenship....just on residency and source of the income.

The UK taxes its residents on their worldwide income, subject to the provisions of numerous bilateral treaties.  I'm still not getting your meaning.

The UK taxes its residents on their worldwide income, subject to the provisions of numerous bilateral treaties.  I'm still not getting your meaning.

The saving clause is there to allow the US to tax on basis of CBT. The UK usually doesn't need that because it will tax on residency or income source. But by not using the saving clause based on residency the UK doesn't take a US government pension paid to a US citizen with permanent residency in the UK......whereas the US will tax a UK Government pension paid to a UK citizen with a green card.

The saving clause is there to allow the US to tax on basis of CBT. The UK usually doesn't need that because it will tax on residency or income source. But by not using the saving clause based on residency the UK doesn't take a US government pension paid to a US citizen with permanent residency in the UK......whereas the US will tax a UK Government pension paid to a UK citizen with a green card.

The UK gives up its taxing rights on a UK govt pension if the recipient is "N&R" in the US (a US national, resident in the US). 

The US doesn't admit that it gives up its taxing rights on a US govt pension if a (US-citizen/LPR) recipient is "N&R" in the UK, but in fact it does, by pretending that the US government pension is UK source income so that the US can legally credit the tax that has been paid to the UK against the tax that is being demanded by the US.

Crazy, no?   

Edit: Also, the UK does not have taxing rights on a US govt pension unless paid to a person who is N&R in the UK.  And the US does not have taxing rights on a UK govt pension unless paid to a person who is N&R in the US.

There is a useful "digest" of relief available with regard to the taxation of UK source income received by non-residents, see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/356800/Digest_of_Double_Taxation_Treaties.pdf

If you receive a pension that is paid for service to the UK Government or a local authority, it is important that you look at the text of the relevant double taxation treaty. This is because:

• A pension paid by the Government of a territory to one of its former employees will, under most but not all double taxation treaties, continue to be taxed by that Government. However that is not always what has been agreed in a particular treaty and there are variations to this general rule.

• Some treaties also provide that, in addition to pensions paid by central government, pensions that are paid to former employees of local authorities will continue to be taxable by the territory that is making the payments.

• Many treaties provide that where the person who is paid a government pension by one territory is a national of (and resident in) the other territory then the right to tax the pension is transferred from the UK to the territory in which the person is resident. These treaties are identified in the table by the abbreviation (N & R) or (UK N excl) as appropriate.

There is guidance on whether a particular pension is treated as being a ‘Government’ type pension in the HM Revenue & Customs International Manual at INTM343040.

(Apologies for multiple edits - this stuff is like double Dutch to me, I keep having to correct myself!)

IMHO the UK should use the saving clause for Article 19 in the situation where the person getting the US Government pension is a UK resident. This would even up the US and UK taxation of Government pensions.

Here's what seems to be the current situation.

UK Government pension paid to a UK citizen permanently resident in the US is taxable by both the UK and the US. The US applies the saving clause so that it can tax it's residents

US Government pension paid to a US citizen permanently resident in the UK is taxable only by the US. The UK does not apply the saving clause to tax its residents.

I can see why the UK would not apply the saving clause because it has a CBT aspect and using it might cause confusion.

IMHO the UK should use the saving clause for Article 19 in the situation where the person getting the US Government pension is a UK resident. This would even up the US and UK taxation of Government pensions.

Here's what seems to be the current situation.

UK Government pension paid to a UK citizen permanently resident in the US is taxable by both the UK and the US. The US applies the saving clause so that it can tax it's residents

If the UK citizen resident in the US is a US national, the UK Govt pension is taxable only in the US.  But if the UK citizen resident in the US is not a US national, the pension is taxable only in the UK.  If the UK citizen resident in the US is a LPR, presumably they would have to resource the pension and claim US FTCs to avoid paying tax to the US as well as to the UK.

US Government pension paid to a US citizen permanently resident in the UK is taxable only by the US.

If the US citizen is also a UK citizen, the UK has the taxing rights, so if the person would have to use US FTCs to claim a refund on any US tax withheld.  But if the US citizen is not a UK citizen, then yes, the pension is only taxable by the US.

The UK does not apply the saving clause to tax its residents.

I suspect the UK takes the view that there would be no point, since to avoid double taxation FTCs would be necessary.  Just causes extra pointless work for both the taxer and the taxee.