US/UK tax on USA pension for British citizen and resident?

bartfast

I'm British, resident in UK, retired and filling a UK tax return every year. In the 20 years until 2010 I had worked and was a resident alien in USA. I have both traditional and Roth pension pots rolled over to a USA brokerage company. Since 2010 I have not filled a US tax return. I've taken distributions and no US tax has been withheld.( I filed in a W8BEN.). I have declared the income from the traditional IRA distributions, on my UK tax return and paid tax on them. I believe UK/USA tax treaty applies that I pay only UK tax on all taxable income. Simple? But this year my USA brokerage company tells me that rules have changed and they must withhold 30%. So what used to be simple looks like getting complicated and potentially I'll lose a lot. Can I avoid the withholding? Can I reclaim? What to do??.. .

EdSwippet

bartfast wrote: »

... But this year my USA brokerage company tells me that rules have changed and they must withhold 30%. So what used to be simple looks like getting complicated and potentially I'll lose a lot. Can I avoid the withholding? Can I reclaim? What to do??

Fidelity, by any chance? Or Voya? Or TIAA-CREF?

The rules have not actually changed. They have however massively complexificated over the past few years (see FATCA for details). And several US pension providers are now utterly scared of non-compliance, or simply don't understand at all how to comply, and so pass on all of the hassles to the consumer.

At its core, assuming you are not also a US citizen -- and assuming that you properly ditched the US green card via form I-407 and also disconnected from the IRS with for 8854 -- you are right that your IRA distributions (provided that you do not take the whole lot as a single "lump sum") are taxable only to the UK, and not the US, under treaty Article 17 para 1. The IRS even provides a handy tax withholding table, and if you look at Income Code Number 15 (Pensions and Annuities) for the UK you will see that the US rate is 0%.

You could try quoting that to your IRA provider, and asking them specifically what rule they think has changed, but the chances are that they won't know and they won't care. You should definitely fight them tooth-and-claw on this though, because if enough people roll over and play dead on this sort of thing it will only worsen further.

If you cannot avoid the 30% withheld for US tax, you should be able to get it all back by filing a 1040-NR form accompanied by an 8833 treaty claim. A real hassle though, not least because you can't do that until past the end of the year, meaning the IRS has an interest free loan of nearly 1/3 of your pension income for up to 18 months.

bostonerimus

You have your tax liability correct and I agree with Ed. If you are doing withdrawals from a defined contribution type plan the safest thing for the US administrator to do is to withhold the 30% and leave it up to you to claim it back. Its a CYA thing. I would point out their mistake, but if they won't budge you'll have to file the 1040-NR with the 8833 showing $0 tax bill and claim a refund of the 30% withholding.

This tread over at US-Yankee might be informative

https://talk.uk-yankee.com/index.php?topic=88242.0

bartfast

Thank you very much both for informative replies.

OldMusicGuy

When I took my IRA distribution (as a lump sum, so taxable in the US), I had to fill out a distribution request and the form allowed me to state if I did not want any tax withheld (and asked me to cite the tax treaty if I did so). So when you take distributions you should cite the double taxation treaty between the US and UK and the provision that states periodic distributions are taxable in the UK. The HMRC pages are pretty easy to follow on this.

bartfast

My brokerage insist on withholding 30%. So it seems to get refund, I have to deal with IRS - 1040NR (and8833?). While waiting for the refund, I would pay UK tax (at lowest rate) to HMRC. Aaargh. Can I get by with just dealing with HMRC and them refunding me? A secondary academic point is which country deserves and/or gets the tax? Is it all designed to make work for accountants? I really don't want to hire one if I pay them as much as I save.

EdSwippet

bartfast wrote: »

My brokerage insist on withholding 30%. So it seems to get refund, I have to deal with IRS - 1040NR (and8833?). While waiting for the refund, I would pay UK tax (at lowest rate) to HMRC. Aaargh. Can I get by with just dealing with HMRC and them refunding me?

Unfortunately not. The US/UK tax treaty is fairly explicit about which country gets the tax, and unless you take a 'lump sum' (*) then it's the UK and not the US. So HMRC is not bound to give you a credit for US tax, and they almost certainly won't. In any case, it sounds like your UK tax would be below the 30% that your boneheaded -- and wrong -- broker (**) insists on withholding. So you would be losing money as well as risking double-tax if you went that route.

bartfast wrote: »

A secondary academic point is which country deserves and/or gets the tax?

As noted above, in this case it is the UK and not the US that gets the tax. It's not academic though. It's real, and defined by treaty.

bartfast wrote: »

Is it all designed to make work for accountants? I really don't want to hire one if I pay them as much as I save.

The currently ongoing exponential increase in busywork government regulation and the compliance cost and workload associated with that mountain of regulation is definitely all part of what keeps accountants in jobs for life, but filing a 1040NR and a form 8833 is not, to quote the current buzzphrase, rocket science. While you could pay an accountant to do it for you, you should be able to complete it yourself in under half an hour.

On the 1040NR you write down the amount your pension paid out ($X), the amount of US tax due ($0), the amount of US tax withheld (0.3 x $X), your effective US tax over-payment (again, 0.3 x $X) and the amount you want refunded (for the third time, 0.3 x $X). On the 8833 you quote treaty Article 17 para 1. Staple them together, mail them to the IRS, and you're done. Nothing about any of your UK or any other non-US income or investment goes onto those forms.

Footnotes:

(*) An irritant is that the treaty never actually defines the term 'lump sum', and it accounting circles has somewhat different meanings in the US and the UK. In the US, it would mean emptying the 401k or IRA entirely. In the UK, the term also encompasses things like the PCLS for UK pensions. So, taking all of it? Clearly a lump sum. Taking it in monthly chunks? Clearly not a lump sum. Taking 50% of it in Dec and the other 50% in Jan? Is that two lump sums, or just two very large monthly but periodic withdrawals? How about four lots of 25% over a year? Eight lots over two years? Nobody really knows.

(**) If I were you I would save my outrage for the broker here, since they are by far the major culprit. The US and UK have agreed a treaty outcome, and the IRS has documented that outcome in a withholding process that brokers can use when making payments to produce the correct US tax results. Your's has simply failed to do that adequately. Have you tried their formal customer complaints process? I would, if this were me (and it may well indeed be me a few years from now). You don't name them, but it could help others if you did.

bostonerimus

bartfast wrote: »

My brokerage insist on withholding 30%. So it seems to get refund, I have to deal with IRS - 1040NR (and8833?). While waiting for the refund, I would pay UK tax (at lowest rate) to HMRC. Aaargh. Can I get by with just dealing with HMRC and them refunding me? A secondary academic point is which country deserves and/or gets the tax? Is it all designed to make work for accountants? I really don't want to hire one if I pay them as much as I save.

Unfortunately there are rules for who gets what and both the IRS and HMRC only need to give you tax credits on amounts paid that actually qualify. The 30% withholding isn't anything to do with what you actually owe in the US (it's a safety thing for the IRS to make sure that people don't forget or refuse to pay their US tax bills) so it's meaningless to HMRC. You pay HMRC what you owe to them and as you have zero liability in the US you can't claim a tax credit on your UK taxes and you have to reclaim the 30% withholding back from the IRS.

bartfast

Thank you for full reply and sympathy. brokerage is Fidelity USA.

EdSwippet

bartfast wrote: »

Thank you for full reply and sympathy. brokerage is Fidelity USA.

Thank you for that detail. I thought it might be. They have a reputation for being bloody-minded about this at the moment.

If you are going to take them to task, I would start by asking whether this is 'Chapter 3' (tax) or 'Chapter 4' (FATCA) withholding. Both have a 30% standard rate, and it would help to know which of the two they think applies. Chapter 3 is ancient, but Chapter 4 is new since FATCA gained its fangs in around 2014 or so, so if they claim that "something" has changed, it might be that.

Payments to the UK from a US pension should be withheld for Chapter 3 tax at 0% due to the US/UK tax treaty. They should be withheld for Chapter 4 FATCA at 0% because the UK has a Model-1 FATCA IGA in force with the US. Perhaps armed with that information you can force some concessions from Fidelity. I can't imagine the IRS being exactly thrilled with Fidelity ignoring these rules either. The outcome for the IRS is that they get to handle 1040NR forms and then issue refund checks (cheques) where they would normally just have nothing to do with these payments. So Fidelity are not only causing issues for you here, they are also causing them for the IRS too.

Ideally you would just transfer this to a better provider, but I suspect that option might prove tricky as an NRA. You might try asking Interactive Brokers -- they claim to offer IRAs worldwide (their definition of "worldwide" somehow manages to exclude Canada, but that's not going to bother you!). Maybe don't hold out too much hope of them allowing you to transfer, though.

My own 401k is with Vanguard, but this is really just good fortune on my part. For the moment, Vanguard seem to be okay, but with each passing year I wonder how long that condition will persist.

International pensions are a massive headache that seems to do nothing but worsen over time. If I had these years over, I am not sure I would save into any US retirement plan a second time. Too many variables and far too much political risk.