Inherited 401(k) and tax implications

Just out of curiosity, were your IRAs set-up by yourself or were they inherited?
Based on my phone call with the HMRC (a tax inspector familiar with the treaty), the treaty isn't applicable at all to an Inherited IRA because it's an inheritance.  That said, I suspect that you could still regard it as pension under the treaty without any consequences.

I'm curious as to why you say that:Why would taking it as income and paying UK tax be more tax efficient than paying UK tax on any gains?  Or are you considering that fact that IRA income would still be taxable in the USA which couldn't be offset by FTCs if gains are just taxed?  (Apologies for any stupidity on my part).

My and my wife's IRAs were both set up by ourselves. They are now with Vanguard who do report the dividends and capital gains each quarter so if you choose to treat your inherited IRA as an inheritance it would be easy to report those gains as income to HMRC, and if it were me the first thing I would do is convert them to HMRC reporting funds so they get the better tax treatment by HMRC.

My and my wife's IRAs were both set up by ourselves. They are now with Vanguard who do report the dividends and capital gains each quarter so if you choose to treat your inherited IRA as an inheritance it would be easy to report those gains as income to HMRC, and if it were me the first thing I would do is convert them to HMRC reporting funds so they get the better tax treatment by HMRC.

Dumb questions, but:
1) What exactly are CUSIP and ISIN numbers?
2) In the HMRC's list of reporting funds (https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds), why do some Vanguard funds have a CUSIP number and some have an ISIN number but none have both a CUSIP and an ISIN number?
3) For my Inherited IRA, assuming I want to invest in only Vanguard funds listed in the HMRC's list of reporting funds, does it matter whether I choose funds with a CUSIP number or an ISIN number?

Dumb questions, but:
1) What exactly are CUSIP and ISIN numbers?
2) In the HMRC's list of reporting funds (https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds), why do some Vanguard funds have a CUSIP number and some have an ISIN number but none have both a CUSIP and an ISIN number?
3) For my Inherited IRA, assuming I want to invest in only Vanguard funds listed in the HMRC's list of reporting funds, does it matter whether I choose funds with a CUSIP number or an ISIN number?

Securities are given a unique number and as is often the case there are 2 standards, the ISIN conforming to the ISO 6166 standard and the CUSIP conforming to the numbering system of the  Committee on Uniform Security Identification Procedures. US and Canada use the CUSIP standard and everyone else uses the ISO standard.

Securities are given a unique number and as is often the case there are 2 standards, the ISIN conforming to the ISO 6166 standard and the CUSIP conforming to the numbering system of the  Committee on Uniform Security Identification Procedures. US and Canada use the CUSIP standard and everyone else uses the ISO standard.

That addresses question 1).  Any thoughts on questions 2) and 3)?

Just to be clear I think the IRA wrapper allows you to ignore the UK reporting funds issues. The inheritance is tax free and just gives you a large UK tax free basis in the IRA.

That addresses question 1).  Any thoughts on questions 2) and 3)?

The answer to questions 2 and 3 is that it is doesn't matter whether they have a CUSIP or an ISIN number (they won't have both).  If they have neither then they won't be reporting into HMRC so HMRC won't believe you if you claim that dividends from a non-reporting fund qualify for special treatment. 

It is important when completing an HMRC tax return that the CUSIP or ISIN of funds are listed so that HMRC can look up the entity in their list of reporting funds.  If you don't provide the "index" number, they are not going to find it.

The answer to questions 2 and 3 is that it is doesn't matter whether they have a CUSIP or an ISIN number (they won't have both).  If they have neither then they won't be reporting into HMRC so HMRC won't believe you if you claim that dividends from a non-reporting fund qualify for special treatment. 

It is important when completing an HMRC tax return that the CUSIP or ISIN of funds are listed so that HMRC can look up the entity in their list of reporting funds.  If you don't provide the "index" number, they are not going to find it.

Are you referring to SA106?  If so, where on that form do you list the CUSIP or ISIN numbers of funds?  (Again, sorry if this is a dumb question.)
[https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604120/SA106-2017.pdf]

Are you referring to SA106?  If so, where on that form do you list the CUSIP or ISIN numbers of funds?  (Again, sorry if this is a dumb question.)
[https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604120/SA106-2017.pdf]

I've only been here a year so not yet filed a tax return, just doing what I have been advised to i.e. Have HMRC reporting funds in taxable accounts and be sure they have a CUSIP or ISIN


Maybe someone who has been through this can comment on the exact mechanics.

Nun, I phoned the HMRC this morning.  You're right, from a UK tax perspective, an inherited IRA can be treated just like an inheritance.  There's no tax on the capital, just tax on any gains.  Interestingly, it said this applies regardless of the frequency of receipts including RMDs.  And Article 17 isn't applicable because it's an inheritance.  This applies to inherited IRAs and annuities.

For self-assessment purposes, if each payment received is broken down by the financial institution into capital and any gain, then just report the gain.  If it's not broken down, you can make an approximation of any gain and report that.  In either case, you just report any gain and provide a brief explanation in the white space.

I was just wondering if anyone has been successful in just declaring the gains from an inherited IRA, as suggested by Alan's conversation with HMRC in 2017?

That advice would seem to be contradicted by the HMRC advice on its community forum Treatment of Inherited IRA accounts in the UK in 2019 (https://community.hmrc.gov.uk/forums/customerforums/pt/fc91c2bb-0d1a-ea11-b265-00155d977196 [nofollow] ): "Where [an Inherited IRA] is equivelant (sic) to a[n inherited] SIPP then you should get full tax relief on the payments in the USA and pay the tax on the income in the UK, where you are resident in the UK."

It also seems to be at variance with Tax on a private pension you inherit (https://www.gov.uk/tax-on-pension-death-benefits [nofollow] ) where most lump sums and draw downs are tax free to you if the deceased was under 75 but subject to your marginal rate of income tax if the deceased was 75+ when they died. 

I was just wondering if anyone has been successful in just declaring the gains from an inherited IRA, as suggested by Alan's conversation with HMRC in 2017?

That advice would seem to be contradicted by the HMRC advice on its community forum Treatment of Inherited IRA accounts in the UK in 2019 (https://community.hmrc.gov.uk/forums/customerforums/pt/fc91c2bb-0d1a-ea11-b265-00155d977196): "Where [an Inherited IRA] is equivelant (sic) to a[n inherited] SIPP then you should get full tax relief on the payments in the USA and pay the tax on the income in the UK, where you are resident in the UK."

It also seems to be at variance with Tax on a private pension you inherit (https://www.gov.uk/tax-on-pension-death-benefits) where most lump sums and draw downs are tax free to you if the deceased was under 75 but subject to your marginal rate of income tax if the deceased was 75+ when they died.

Hello ttthew,

I too would be interested to hear of other's experience.  For my part, for the 2017-18 UK tax year, in form SA100, in the box for "Any other information", I wrote:

"I recently inherited accounts in the USA. From a UK perspective, I am treating these accounts as an inheritance, i.e. there is no tax on capital but I need to pay tax on any gain. I determined the growth within distributions received during the 2017-18 tax year to be £xx.xx (£xx rounded) in dividends, hence I have declared this amount in form SA106."

And for each subsequent UK tax year, I've left the "Any other information" blank and simply reported growth within distributions in form SA106. The HMRC hasn't said a peep about it, and I have a good record of what the informed gentleman told me on the phone, so I'm sticking to my plan of just reporting any growth within distributions in form S106.

Note that for the 2020 US tax year, you can forgo receiving an RMD from an inherited IRA if you don't want it; it's a one-off thing due to Covid-related rule changes.  But this doesn't apply to distributions from an inherited annuity.

- Alan

Edit:  Just for clarity, as a US citizen, I get no tax relief in the US on distributions I receive from my inherited IRA or inherited annuity.  Distributions from both are fully taxable in the US and, as a US citizen, I declare said distributions on my US tax return each year.

Thinking of those that are not U.S. Persons and the estate tax limit of $60k. I believe there is a U.S. and U.K. Estate Tax agreement that can address such issues though?

Edit:  Just for clarity, as a US citizen, I get no tax relief in the US on distributions I receive from my inherited IRA or inherited annuity.  Distributions from both are fully taxable in the US and, as a US citizen, I declare said distributions on my US tax return each year.

  This is not entirely accurate. Article 24 gives relief in the US for UK tax paid on doubly taxed income. 

  This is not entirely accurate. Article 24 gives relief in the US for UK tax paid on doubly taxed income.

Not disagreeing with anything you're saying.  Form a US tax perspective, my UK earned income is excluded via the Foreign Earned Income Exclusive.  What little I make from my inherited IRA and annuity distributions in the US is declared in the US, but it doesn't take me over my personal allowance (or whatever it's called) and hence I pay no US tax.  It's the fact that I have to file a US tax form in the first place that is a real PITA even though I'm resident in the UK, but that's a different topic altogether.