IHT and/or income tax on a lump sum payment from US based pension fund?

Ducky1702

Hi,

Apologies if this is something already covered elsewhere but I've searched in vain on the forum and also on the internet. I originally posted this question in the death/funerals/probate section but it was suggested that I may get more response here due to the unusual situation.

Can anyone tell me how UK IHT and income taxes would work on a lump sum payment to a beneficiary from a US based pension fund?

My situation is that I was a named beneficiary for a lump sum payment on death of a member of a US based pension scheme. My understanding is that the trustees of the pension fund do not have discretion to pay to anyone else. From my reading of HMRC guidance, this seems to mean that the lump sum should be reported on the IHT400 form and included as part of the estate rather than the more common situation in the UK of such payments being considered outside of the estate (I understand it's more usual for beneficiaries to be nominated but that trustees retain discretion of who actually gets paid).

First question is whether anyone can confirm that my interpretation on IHT is correct.

If it is correct that the lump sum payment is part of the estate and IHT due, then can anyone tell me if is also subject to income tax when I fill in my self assessment? If so, is there some way of offsetting the IHT or am I effectively double taxed?

For avoidance of doubt, I am also seeking professional guidance on this, but am interested in getting the views of the forums because my first attempts at getting guidance suggest to me that this may be a complex and unusual situation. I'm also surprised that I can't find much guidance on this on HMRC website or anywhere on the internet.

Thank you. 

More_complicated_than_that

Choose your tax professional with a lot of care.  This is not something that 99.5% (*) of people who do tax will be competently able to advice on (* = made up number that probably understates things - you need an IHT specialist who understands s5(2) IHTA and US tax).

It might be right that the US pension will be included in the value of the deceased's estate.  However, that might not be right or there may still be no IHT (e.g. you might be the widow/widower of the individual who died, the individual who died might not be domiciled in the UK for IHT purposes, the US trustees might have discretion as to how to provide the benefits - e.g. flexible drawdown).  They will also be able to help with who is liable for the IHT (e.g. is it possible / could there be a benefit of the US trustee paying it out of the pension fund) and the interaction with US estate duties (if relevant).  From an income tax perspective, the UK-US DTA may apply and there may well be US tax (if not taxed in the UK) or withholding tax in the US that can be reclaimed (if taxed in the UK). I can't tell you whether UK income tax will be due as this will be something for your chosen tax adviser with full knowledge of the facts and circumstances.

You can find some guidance from HMRC (e.g. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm17052).

xylophone

https://community.hmrc.gov.uk/customerforums/pt/fa298af2-eee4-ed11-913a-00155d978126

Hi my late mother worked in the US for a number of years, but returned to the UK many years ago and was UK resident and domiciled when she died recently. She had a US based pension fund called an IRA (Individual Retirement Account) which still has money left in it. Does this pension fund form part of her estate for IHT purposes, or is it excluded in the same way as a UK SIPP would? Many thanks in advance.

Posted 11 months ago by HMRC Admin 19 

Hi,

Please contact the Inheritance Tax team for further advice.