Dual tax treaty US/UK

nklewis

Have a US annuity fund ,residue of a 'difficult' divorce.I am a UK citizen and resident and pay tax in the UK. I requested a withdrawal of $19267 to pay off my mortgage.This would be under the 25% pension withdrawal in the UK and would have kept me in the Basic Tax  band. The withdrawal was to be from one fund. I submitted my ITIN and a W8BEN clearly identifying me as ' non resident alien'
The firm withdrew money from all the funds to pay tax at 30%, in a process called 'gross up'. The total withdrawal was $27525.37, affecting my UK tax situation.
The money was due for payment last tax year, funds having been requested in February.Cheques were sent surface  mail,untracked,by courier services.One cheque got lost,a second was incorrectly addressed so got delayed for weeks. In despair I  contacted head office who,after  much  hassle,expressed the cheque.The cheque requested in February eventually came in June.
HMRC are unclear about the tax, the IRS  have ignored two letters and the Kentucky Regulatory  Board have ignored me.
The firm are still sticking to the 30%  tax, but  I  now  think they've made a mistake and can't admit it. And I've never got  to an  explanation for 'gross up 'applied to tax..
Any advice very gratefully received.
Thanks

Jeremy535897

I assume you are not also a US citizen?

You will be lucky to find advice on this forum as to the correct US treatment of the sums you received. Leaving that aside, have a look at articles 17 and 18 of the UK-US double taxation agreement:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/507431/usa-consolidated_-_in_force.pdf

I cannot see that the 25% tax free withdrawal rule applies to a US annuity, but this is a complex area. It depends on the precise nature of the annuity. See:

https://www.gov.uk/government/publications/pension-tax-for-overseas-pensions/pension-tax-for-overseas-pensions

Cook_County

Assuming you are a non-resident alien, you would file a Form 1040-NR with the IRS, calculating any refund due in the US. The 30% is simply a withholding tax and never the final tax. In the UK, the rules for calculating chargeable events on offshore bonds are used to calculate any amount subject to UK tax. You'll need to calculate this and report it to HMRC on your UK self-assessment tax return. Most likely your solicitor obtained expert witness advice on both US and UK tax issues as a part of the divorce, so you may have this set out in writing already.

EdSwippet

nklewis said:

The firm are still sticking to the 30%  tax, but  I  now  think they've made a mistake and can't admit it. 

Arguably, given that you have sent them a W-8BEN form claiming treaty benefits, they have made a mistake. The IRS publishes a list of withholding rates for payers to use for monies paid to US nonresident aliens in various countries:

https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf

The rate for the UK for "Pensions and Annuities", income code 15, is 0% (found at the bottom right of page 4). Unfortunately, a lot of US financial organisations are sufficiently terrified, intimidated, and/or baffled by what passes for IRS "guidance" on payment withholding that even when armed with all the W-8BENs they need, they will simply do the default thing, flat US tax withholding at 30% of everything, and leave it to the taxpayer to deal with the fallout. The IRS has no penalties for payer over-withholding, only under-withholding. So to the extent that it is a payer "mistake", even if deliberate, it is one with no consequences for the payer.

As indicated upthread by Cook_County, you can file a 1040-NR return to recover this 30% withholding from the IRS. Search the 1040-NR instructions for "Simplified Procedure for Claiming Certain Refunds". The use of the term "simplified" here may be a rare case of US irony.

EdSwippet

Cook_County said:

Assuming you are a non-resident alien, you would file a Form 1040-NR with the IRS, calculating any refund due in the US. The 30% is simply a withholding tax and never the final tax. In the UK, the rules for calculating chargeable events on offshore bonds are used to calculate any amount subject to UK tax. You'll need to calculate this and report it to HMRC on your UK self-assessment tax return.

Right. The problem for the OP though, is that they requested $19267 and the payer effectively paid them $27525, with $8257 of this simply routed through the IRS first (when reclaimed). This $8257 represents unwanted UK income which potentially pushes the OP into higher rate tax that could otherwise have been avoided. The cost to them of this way of payer behaviour could be 40% - 20% = 20% of $8257, so $1651 of arguably unnecessary and deadweight UK tax.

The "right" way to do this would I suppose have been to request a payment of $13487, let the payer withhold $4046 for US tax, then reclaim that. However, this would require prior knowledge of the payer's internal processes (or lack thereof) for handling W-8BEN and nonresident alien withholding. Nobody can realistically know that in advance. From direct bitter experience, even the payer themselves usually cannot answer that question accurately when asked.

And all this is without factoring in US tax filing dates and IRS delays. The earliest the OP can file a 1040-NR for this year will be around Feb/Mar 2022, and the IRS regularly pushes nonresident alien returns to the back of their queue. I filed my 1040-NR for 2020 in Mar this year, and I am still waiting for my refund. So a year, eighteen months, or even more delay before the OP gets their full annuity payment.

Not exactly encouraging, is it?

ElmoR

I cannot help with any advice/comments but I just wanted to say that I feel your pain.

It's more than 20 years ago that I had similar tax wrangles after a few years working as a resident alien in the US. It was such a painful experience in form filling and phone calls that I don't think I would ever try to do it again!

Best of luck sorting it all out.