I think I was wrong. Distributions from the Inherited IRA would not be income......similarly an IRA to ROTH rollover is not income so Article 17 does not apply.
US tax is due on the distribution, but there's no UK tax on the initial capital, just tax on any gains.
I'm still struggling on the treatment of an Inherited IRA from a UK perspective.
One the one hand you can argue that, as an inheritance, the capital itself is not taxed but any subsequent gains would be taxable. Googling around, I found one tax expert (David Treitel) who also supports that view.
http://www.accountingweb.co.uk/any-answers/likely-penalties-for-non-disclosure-of-foreign-income-when-no-tax-is-due Although worryingly I haven't found any other supporters of that perspective.
On the other hand, the HMRC has a website that appears to provide guidance on tax on inherited private pensions.
https://www.gov.uk/tax-on-pension-death-benefits Here, much depends on the type of payment you get, type of pension pot and age of the pension pot's owner when they died. Sometimes it's taxable, sometimes it's not. But does any of this apply to an Inherited IRA? Is an Inherited IRA an inherited pension?
Another HMRC website considers the UK tax position for the 2003/4 tax year and beyond (under the treaty).
https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a"IRAs: Years up to 2002/03
The UK tax position for income tax years up to and including 2002/2003 is as follows;
Provided that the taxpayer has not nominated a beneficiary to receive the balance of the IRA on his death, the trust is transparent for UK tax purposes. Income of the IRA trust is chargeable as it arises, unless the Remittance Basis applies (see IM1560 et seq). The nomination of a beneficiary creates a settlement within the terms of the provisions of ICTA88/S672. In such a case the taxpayer is liable to UK Income Tax under Case VI of Schedule D on the IRA income arising in the tax year (ICTA88/S675).
Whether or not a beneficiary has been nominated, an IRA is a bare trust for the purposes of TCGA92/S60. The taxpayer is therefore chargeable to United Kingdom Capital Gains Tax in respect of any chargeable gains arising on the disposal of IRA investments. Changes in IRA investments will generally involve acquisitions and disposals of chargeable assets by the taxpayer.
Withdrawals from an IRA do not of themselves give rise to a charge to Income Tax or Capital Gains Tax, but they will often be preceded by the disposal of IRA investments (including the conversion of dollars to sterling) giving rise to a chargeable gain or an allowable loss.
IRAs: Year 2003/04 et seq.
This will not be the position for years 2003/04 onwards. The new Agreement takes precedence and this will mean that no liability will arise until it would have done so under US tax law. Under US law, this will be when distributions are made. As indicated above, this will generally not be before age 591/2 but must be before age 701/2. The important point to note is that income will no longer be assessable in the UK on the basis of income arising within the IRA. Any case of doubt or difficulty should be referred to HMRC, Customs & International, Tax Treaty Team."This appears to say that UK tax liability only applies to distributions received. Note that is says
"The important point to note is that income will no longer be assessable in the UK on the basis of income arising within the IRA." I take this to mean that there is no tax any any capital gains within the IRA. But again, is an "IRA" in this context the same or different to an "Inheritied IRA"?
More generally, do we actually have a choice how to treat an Inherited IRA from a UK perspective (i.e. as a regular account or as a pension)?
Any thoughts are welcome.
