Hargreaves Landsdown force SIPP closure

I am a US resident - and have had a SIPP from Hargreaves Landsdown for 20 years or so. They increasingly cracked down on US residents - first they wouldn't let me add to my SIPP after I moved to the US (AJ Bell SippDeal do), then they stopped me using their currency exchange service, and the latest is they require me to liquidate and close my account and have given me 60 days to do it. It's a SIPP so you could imagine the tax consequences...fortunately I can transfer it to AJ Bell in specie. Anyone else with this issue I suggest you go with AJ Bell / YouInvest. They also allow an automatic monthly withdrawal (UPSCL or something - HL require a form each month) and allow structured products (HL do not).

A

A few years ago now, as a dual US/UK citizen resident in the USA, I consolidated my HL SIPP and two (relatively small) private pensions into one AJ Bell SIPP. The transfer was smooth and I saved substantially on fees. I agree with the comments re HL. AJ Bell have been excellent.

I got a similar letter from Hargreaves Lansdown but it said that as I have become a US resident, I need to sell OEICs and unit trusts (UK terms for what are basically mutual funds as far as I know) within 60 days. I called and they said it was OK to buy ETFs instead, so I'm swapping my funds for ETFs. I thought about switching to AJ Bell but their website seems a little clunky and service seems awkward. MyExpatSIPP is another option, but they seem new and a little small.

For now I'm going to stay with HL, but I'm curious if anyone has had more trouble using HL while living in the US.

Sorry if it's frowned upon to update old threads here, but I thought this would be relevant for future readers.

Yes I should clarify - I didn't actually have to close the account, I  just had to get rid of the assets you mentioned. I did close it because I find YouInvest much more flexible, already had an account there, and they accepted transfers in specie.  They also allow me to continue to contribute (HL don't) and offer a monthly drawdown option without having to file paperwork every month. It's HL being over cautious as the funds in SIPPS are not required to be PFICd anyway.

Ah OK, it makes more sense that we both got the same letter. What did you mean about the tax consequences? Transactions inside a UK pension (rollovers, buying, selling, changing investments etc) aren't taxable by the IRS or HMRC as far as I know -- only distributions (with some exceptions) are.

A cautious US person investor would not hold PFICs (including non-US ETFs) in a SIPP.  This is partly because the proposed PFIC regulations treat death or expatriation as an expatriating event.

Some States, such as California, would tax income & gains within a SIPP. 

Most SIPPs would be reported on Schedule B, Part III; FBAR & 8938 each year.  3520 & 3520-A filing is most likely required.

I understand about that and it's concerning, but the tax litigators, CPAs, and pension administrators I've spoken with do not think a SIPP is a foreign grantor trust or PFIC wrapper under any sane interpretation of the UK-US tax treaty.

Has anyone come across a case of the IRS arguing that a UK pension (not something offshore like a QROPS or a non-retirement account like an ISA) requires trust or PFIC filing?

I agree that it's considered a foreign account for 8938, schedule b, and maybe FBAR purposes. I have no idea or opinion about state taxes; thanks for mentioning that.

Hi there,

My comments RE the tax implications were if I had to close the account and no-one else would accept it. AJ Bell / YouInvest took it and I transferred in specie (I didn't have to sell anything).

Your question RE PFIC / trusts etc. has been asked before, believe me.

Thun Financial says this:

https://thunfinancial.com/home/american-expat-financial-advice-research-articles/american-expat-pfic-uk-non-reporting-fund-investment-trap-article/

"Because assets in these accounts are subject to a separate set of tax rules in both the United States and the United Kingdom, none of the rules regarding either PFICs or “non-reporting” funds apply if the funds in question are held inside a qualified retirement account. Therefore, a U.S. citizen building up a retirement nest egg through a UK employer provided pension plan needn’t be concerned that the investments in the plan are PFICs"

TaxesForExpats say this:

https://help.taxesforexpats.com/article/537-uk-isa-sipp-foreign-trusts-on-us-tax-return

"SIPP are not foreign trusts - beware of redundant forms

Because of the U.K.-U.S. treaty, SIPPs are considered IRS-qualified pension accounts. Therefore, there is no need to report them as foreign trusts. Income in SIPPs can be deferred just like income in a U.S. IRA accounts.

We are often asked this question (is my SIPP a foreign grantor trust), as other tax preparers (often in the U.K) are notorious for preparation of redundant forms to justify high fees they charge for US tax returns. Ironically, along with forms 3520-a they commonly file form 8833 explaining that US retirement plans are IRS-qualified, although it has been determined that this obvious fact does not need treaty-position disclosure."

My very expensive US Tax attorney told me the same thing.

You definitely need to report on FBAR assuming your foreign accounts, including retirement accounts are more than 10K, and perhaps 8938.

Also, RE 8833:

The code contains an exception so you don't have to file the form for pensions:

26 CFR 301.6114-1(c)(c) Reporting requirement waived.
(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;

I asked the same question in this thread RE anyone knowing of issues with SIPPs / PFIC / Trusts:

https://talk.uk-yankee.com/index.php?topic=95518.0

"Let's turn this around  - does anyone have any evidence of anyone with a SIPP ever being penalized for not filing these forms?"

No-one replied.

I can refer you to a US tax attorney who will support this position and also a very reasonable US accounting firm who actually do my returns, under the advice of said tax attorney, for less than $500 US per year. That includes FBARS, 8938, 1040, 5471s, and 3 rental properties.

A

I agree that no Form 8833 would be required.  I also agree that the treaty allows the income in a SIPP to be deferred.  It is a difficult question as to whether the treaty overrides the PFIC rules.  Let’s assume that the treaty prevails.  Since there is no penalty for failing to file the PFIC form (Form 8621), it doesn’t matter that much if the form is not filed.

Taxesforexpats is not consistent in their use of terms.  The title says “SIPPs are not foreign trusts.”   It seems quite obvious that SIPPs are foreign trusts.  SIPPs are created by “trust deeds” and have trustees that hold assets for beneficiaries.  So clearly, the title is wrong.

Taxesforexpats says “Because of the U.K.-U.S. treaty, SIPPs are considered IRS-qualified pension accounts. Therefore, there is no need to report them as foreign trusts.”  Most pensions are trusts, even in the U.S.  If a UK pension is somehow “qualified” by the IRS, that does not change its character to be something other than a trust.  Perhaps they are suggesting that although SIPPs are foreign trusts, SIPPs don’t need to be reported as foreign trusts?

Taxesforexpats says that it is often asked if a SIPP is a “foreign grantor trust.”  It is interesting that they inserted the word “grantor” here but did not include it above.  Some types of UK pensions would not be considered “grantor” trusts because they are set up and administered by UK employers.  These types of trusts are referred to as “employees’ trusts.”  IRC Sec. 402(b).

There are two important rules that apply to Sec. 402(b) employees’ trusts.  First, they are not treated as grantor trusts, even if they otherwise would be.  IRC Sec. 402(b)(3).  Thus, Form 3520-A would not be required for Sec. 402(b) employees’ trusts.  Second, Sec. 402(b) employees’ trusts are exempt from filing Form 3520.  IRC Sec. 6048(a)(3)(B)(ii)(I). 

Therefore, both Forms 3520 and 3520-A can be avoided if the SIPP is a Sec. 402(b) employees’ trust.  Unfortunately, SIPPs are not set up and administered by UK employers.  Therefore, they would not be treated as Sec. 402(b) employees’ trusts.

Form 8938 is required by IRC Sec. 6038D.  Forms 3520 and 3520-A and 3520-A are required by IRC Sec. 6048.  The treaty does not discuss at all the U.S. tax reporting rules.  Therefore, the treaty does not provide any rule to override U.S. tax reporting rules.  It is interesting that your tax attorney has concluded that the treaty does not override IRC Sec. 6038D (Form 8938) but does override IRC Sec. 6048 (Forms 3520 and 3520-A).  Do you have any information why he feels this way?

The form 3520 instructions also say not to file the form for plans described in 404A or 404(a)(4), in addition to 402(b). Would that affect whether the form is required?

Sec. 404A applies only to a “qualified foreign plan.”  A qualified foreign plan is a plan of an employer for the exclusive benefit if its employees.  Sec. 404A(e).  Since a SIPP is not set up by an employer for its employees, this exception would not apply.

Sec. 404(a)(4) applies if the plan would qualify for exemption under the U.S. pension rules except that it is created outside the U.S.  There are many requirements to qualify under U.S. rules.  For example, the plan must prohibit discrimination against highly compensated employees.  Since a SIPP would not have this type of language in the trust deed, this exception would not apply.

It sounds like the intention to not require reporting on 3520 for a SIPP *might* be there, but the literal language isn't. The tax code seems several decades out of date and unsuited to the trend for people to move from group plans to personal plans. I'm going to seek more legal advice.

I can't answer this:

<<Form 8938 is required by IRC Sec. 6038D.  Forms 3520 and 3520-A and 3520-A are required by IRC Sec. 6048.  The treaty does not discuss at all the U.S. tax reporting rules.  Therefore, the treaty does not provide any rule to override U.S. tax reporting rules.  It is interesting that your tax attorney has concluded that the treaty does not override IRC Sec. 6038D (Form 8938) but does override IRC Sec. 6048 (Forms 3520 and 3520-A).  Do you have any information why he feels this way?>>

But the taxes forexpats page prefixes the section I quoted with this:

"SIPPs are trusts to the same extent that every retirement account is a trust by nature."

Here's the thing. I'm not a tax attorney or an accountant. I rely on the advice of people who are experts in their field. I have paid one for advice and done some research myself. If two companies, who presumably file lots of returns for US persons with UK assets advise what in general needs to be done, and an internationally recognized tax attorney whom I paid for an opinion, and who will stand by it, advise me what to do, I'm happy. I've done my due diligence. I can't explain the intricacies of the law and I shouldn't have to. If the IRS come knocking in the future we'll we see what happens. I doubt they're really interested in me who has done his best and who has taken advice.

Rumsfeld used to send a letter with his tax return indicating he had done his best to comply with the tax laws but they were so complex and sometimes contradictory he had no idea whether they were correct or not.

This message was posted a couple of years ago which I saved - that's good enough for me. He actually went into the US Embassy and spoke to some IRS employees there.

"Hey guys, just wanted to follow up on this to share what I've learned, in case there are others in my same position.

I've just come back from the US Embassy where I met with a couple members of the IRS department there. I took with me some notes from this conversation, specifically the references to IRC section 402(b) and 409A, and questions about the UK/US tax treaty Article 18, and form 8833.

The basic gist of my meeting was: "stop worrying so much."

The IRS employees I spoke with (btw to my surprise they're a friendly, down-to-earth bunch!) told me that since I am taking part in a standard UK pension, which behaves like all regular UK pensions do, I do not need to worry about reporting my contributions, my employer's contributions, or any growth in the fund on my federal income tax return. It is only when I start taking distributions from the pension that I will start to pay tax on it, and at that point it will depend on which country I am resident.

I asked them what happens when I leave my employer and roll over the pension into a regular UK personal pension. So long as it's a direct rollover into a pension that behaves the same way, again I don't need to worry. They said that the idea of treating a personal pension as a foreign trust, and having to worry about foreign trust reporting, was a highly conservative stance to take ("paranoid" in fact was the word they used).

Another notable quote from them: "I have never known anyone to file a form 8833 for a UK pension." Form 8833 comes in to play if you are taking an abnormal position with regard to the tax treaty, and omitting a UK pension from your income is not an abnormal position.

Again, I was told that the only place I need to report my UK pension is on my FBAR, and form 8938, if applicable.

Guya, thanks very much for your advice and help with this, it was very helpful to have some notes to take with me from someone who knows what they're talking about. I appreciate that as a tax professional it is in your best interest to take as careful and conservative a position as possible. But it definitely put my mind at ease to learn that the IRS is not nearly as draconian and punitive as one might think. They want you to be able to invest for retirement and the tax treaty is there to help you with that, and avoid double taxation wherever possible.

If you are an ordinary person with an ordinary income taking part in an ordinary UK pension, there's no reason to freak out or think that your taxes have just become incredibly complicated. File your FBAR, file your form 8938, take the foreign tax credit, and Bob's your uncle."