Under the UK/US double tax treaty, lump sum payments from a US pension, paid to a UK tax resident have typically been exempt from UK tax. The UK-US tax treaty has a “savings clause,” which effectively allows the UK or US to tax the individual in question as though the treaty did not exist for certain sources, including the lump sum pension payment.
Historically, this is only something that the US authorities have taken advantage of. However, new guidance in HMRC manuals has suggested that HMRC wishes to invoke this right in this type of situation, but it could potentially be considered more widely as a way of generating additional tax revenue.
What this will ultimately boil down to is the tax rate that you are paying in the UK. For example, if there was a 30% withholding in the US on any payment, if you were to be a 20% taxpayer in the UK, no further tax would be due because of double tax relief. However, where the UK rate is 40% or 45% there would be a difference of 10-15% to pay on top of what has already been paid, this would need to be included on a UK tax return with the relevant claim for double tax relief.
For those UK tax resident individuals looking at taking their US pension as a lump sum, we recommend that you speak to us to ensure that you are aware of the wider tax and financial planning implications.
For more information, please get in touch with us here.
