Non-UK resident SIPP Inheritance

[yieldhog]

To keep things simple, does anyone know how UK tax rules work for a non-UK resident inheriting a SIPP?

Specifically, One of my sons is a long-term US resident. I understand US tax rules are draconian for US residents benefitting from an overseas trust (eg a SIPP). Could the SIPP be cashed in and passed to him as a cash inheritance?

I would appreciate any help with this issue.

Thanks,
Y

[Ma1co1m]

Hi Y

I have just sent you a PM which is too long to post here. But for anyone else interested the gist as I understand it is ( based on an exchange with AJ Bell in 2021 ):
If you die before age 75 the beneficiary needs a UK bank account and there are ways and means of non-UK residents doing that. They can then do what they want with it
If you die after 75 they can transfer their inherited SIPP to their own overseas pension scheme as long at that scheme is on the QROPS ( Qualifying recognised overseas pension scheme ) list
ma1co1m

[yieldhog]

Thank you malcolm,
I will contact my SIPP provider.
For the record, I am over 75 and My SIPP is with Interactive Investor (ii). My son is dual UK/US nationality but permanently resident in the US.

Does anyone reading this have any experience of this issue with ii ?

Y

[mc2fool]

To keep things simple, does anyone know how UK tax rules work for a non-UK resident inheriting a SIPP?

Specifically, One of my sons is a long-term US resident. I understand US tax rules are draconian for US residents benefitting from an overseas trust (eg a SIPP). Could the SIPP be cashed in and passed to him as a cash inheritance?

I would appreciate any help with this issue.

Thanks,
Y

Simply fill out the Expression of Wishes to give your son the value of the SIPP. https://www.ii.co.uk/support/expression-of-wishes. As he is non-UK resident there won't be any UK tax on it, and as a SIPP is a discretionary trust there'll be no (UK) IHT on it either.

Note however, that if rather than filling out an Expression of Wishes you stick it in your will then that takes the funds out of being in trust and they'll become part of your estate and subject to UK IHT.

You may want to drop ii a secure email to see if they have any logistical requirements, like the beneficiary needing a UK bank account.

[Ma1co1m]

Hi mc2

That's not quite what was told. I was told that anything taken from an inherited SIPP where the person died aged over 75 is taxed as income and it doesn't matter that the recipient isn't uk based so getting them a tax code would be a nightmare. That was why a transfer to a qrops listed overseas pension was the way to go. Was I misinformed ?

ma1co1m

[genou]

Hi mc2

That's not quite what was told. I was told that anything taken from an inherited SIPP where the person died aged over 75 is taxed as income and it doesn't matter that the recipient isn't uk based so getting them a tax code would be a nightmare. That was why a transfer to a qrops listed overseas pension was the way to go. Was I misinformed ?

ma1co1m

As I read the UK-US Double Tax Treaty, a US resident won't be taxed in the UK on income withdrawals from a UK SIPP

ARTICLE 17
Pensions, social security, annuities, alimony, and child support
1. (a) Pensions and other similar remuneration beneficially owned by a
resident of a Contracting State shall be taxable only in that State.


It does not follow that this treatment holds for all jurisdictions. Where was the recipient resident that you were advised they transfer to a QROPS ?

[TedSwippet]

As I read the UK-US Double Tax Treaty, a US resident won't be taxed in the UK on income withdrawals from a UK SIPP

ARTICLE 17
Pensions, social security, annuities, alimony, and child support
1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

It does not follow that this treatment holds for all jurisdictions. Where was the recipient resident that you were advised they transfer to a QROPS ?

This is right as far as it goes. However, it needs to be read in conjunction with paragraph 2 of the same treaty article:

2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.

In other words, regular payments from a UK pension to a US resident are taxable only to the US, but a lump sum (however defined) is taxable to the UK. But then ... treaty article 1 paragraph 4:

4. Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.

This overrides article 17 paragraph 2 above for the US, so it would appear that both the US and UK can tax lump sums from a UK pension paid to a US resident. In that case, double tax is avoided by using tax credits, treaty article 24. The end result is the higher of the two countries' tax rate. One significant problem is that 'lump sum' is never defined within the treaty, one of several grey areas in the treaty that leads to uncertainty in some cases.

As for QROPS ... when the US is involved, forget it. Transferring a pension into (or out of) the US but leaving it intact is virtually impossible, since the US pension system is almost entirely hermetic. And QROPS to a third country, Malta for example, is viewed by the US as a fully taxable event (strictly, it is not a "transfer" within the US/UK treaty definition of a "pension"). Something very much to be avoided there, then.

Finally, links to two articles which provide a bit of background reading on tax rules UK pension for US residents :

• Is UK Pension Taxed in the United States? - Golding & Golding
• Is a UK Pension Lump Sum Taxable In The US - Castro & Co

Of special note is that these are at polar opposites when deciding whether or not the 25% tax free PCLS is still tax free when received by a US resident. Both sources are well respected and, arguably, pretty reliable. This just goes to show how murky some of the grey areas in the US/UK tax treaty really are.

Unsatisfactory as it is, then, unfortunately this is the reality of US/UK cross-border tax. If it's any consolation, believe it or not, the US/UK treaty is actually one of the better ones in this respect.

[mc2fool]

That's not quite what was told. I was told that anything taken from an inherited SIPP where the person died aged over 75 is taxed as income and it doesn't matter that the recipient isn't uk based so getting them a tax code would be a nightmare. That was why a transfer to a qrops listed overseas pension was the way to go. Was I misinformed ?

Maybe, maybe not. I was going on ii's page saying "Death after age 75: Since 6 April 2016, payments of lump sums and as pension income made to an individual are subject to Income Tax at the recipient's marginal tax rate", figuring that the OP's son's UK marginal rate would be zero and my now rather ancient and always was skimpy knowledge of the US-UK DT treaty from when I lived in the US in the 1980s (none of which involved pensions at the time!).

Clearly TedSwippet is a lot more up on these matters than I, so I will defer to his knowledge, but, for those that really like to research, just add one more link, being to the manuals HMRC uses itself, internally.

https://www.gov.uk/government/collections/hmrc-manuals

Elucidation may be found in the Double Taxation Relief Manual, Employment Income Manual (includes pensions), Inheritance Tax Manual and/or the Inheritance Tax Manual. Maybe another or two if I've overlooked any.

[Ma1co1m]

My son is in New Zealand, so when I got my guidance that was where we were talking about and that is what my comments above refered to.

I'm afraid I hadn't considered that the US might be different but I guess this whole area is a bit of a minefield....

ma1co1m

[yieldhog]

This area of IHT really is a minefield and after several years of trying to find solutions for our situation I'm still without a clear plan.
I do have an excellent US legal adviser who has been very helpful to our son who lives in the US. We established a US Trust for him which has enabled him to receive US/UK tax free gifts while protecting him from unwelcome claims on his estate (from any future ex-wife or her family, for example). I should add though that it's been an expensive exercise.
The situation for our UK resident dual citizen son is more complicated and I fear that another expensive exercise will be necessary.
Can anyone recommend a good UK based specialist in US/UK tax law?

Y

[Dod101]

To keep things simple, does anyone know how UK tax rules work for a non-UK resident inheriting a SIPP?

Specifically, One of my sons is a long-term US resident. I understand US tax rules are draconian for US residents benefitting from an overseas trust (eg a SIPP). Could the SIPP be cashed in and passed to him as a cash inheritance?

I would appreciate any help with this issue.

Thanks,
Y

Simply fill out the Expression of Wishes to give your son the value of the SIPP. https://www.ii.co.uk/support/expression-of-wishes. As he is non-UK resident there won't be any UK tax on it, and as a SIPP is a discretionary trust there'll be no (UK) IHT on it either.

Note however, that if rather than filling out an Expression of Wishes you stick it in your will then that takes the funds out of being in trust and they'll become part of your estate and subject to UK IHT.

You may want to drop ii a secure email to see if they have any logistical requirements, like the beneficiary needing a UK bank account.

I doubt that ‘sticking it in your will’ will change the pension regime under which a SIPP is governed. If that were so, it would be quite interesting for me and I imagine many others. Do you have any basis for that comment? You are suggesting that merely including a SIPP disposition in a Will changes the whole taxation regime under which it is governed? That of course includes the ownership by pension trustees.

Dod

[mc2fool]

Simply fill out the Expression of Wishes to give your son the value of the SIPP. https://www.ii.co.uk/support/expression-of-wishes. As he is non-UK resident there won't be any UK tax on it, and as a SIPP is a discretionary trust there'll be no (UK) IHT on it either.

Note however, that if rather than filling out an Expression of Wishes you stick it in your will then that takes the funds out of being in trust and they'll become part of your estate and subject to UK IHT.

You may want to drop ii a secure email to see if they have any logistical requirements, like the beneficiary needing a UK bank account.

I doubt that ‘sticking it in your will’ will change the pension regime under which a SIPP is governed. If that were so, it would be quite interesting for me and I imagine many others. Do you have any basis for that comment? You are suggesting that merely including a SIPP disposition in a Will changes the whole taxation regime under which it is governed? That of course includes the ownership by pension trustees.

Dod

https://www.ii.co.uk/support/expression-of-wishes#faq6

[Dod101]

Simply fill out the Expression of Wishes to give your son the value of the SIPP. https://www.ii.co.uk/support/expression-of-wishes. As he is non-UK resident there won't be any UK tax on it, and as a SIPP is a discretionary trust there'll be no (UK) IHT on it either.

Note however, that if rather than filling out an Expression of Wishes you stick it in your will then that takes the funds out of being in trust and they'll become part of your estate and subject to UK IHT.

You may want to drop ii a secure email to see if they have any logistical requirements, like the beneficiary needing a UK bank account.

I doubt that ‘sticking it in your will’ will change the pension regime under which a SIPP is governed. If that were so, it would be quite interesting for me and I imagine many others. Do you have any basis for that comment? You are suggesting that merely including a SIPP disposition in a Will changes the whole taxation regime under which it is governed? That of course includes the ownership by pension trustees.

Dod

https://www.ii.co.uk/support/expression-of-wishes#faq6

Well I must say I did not know that, if of course that is correct. I wonder if it is? I was always under the impression because I am sure I was told at some point that it was not possible to direct the funds held in a SIPP to someone via a Will. But maybe that is simply because most of us would not want to lose the benefit of the assets held being IHT free. Sounds weird to me. What you are saying is that at the point of death, a SIPP can suddenly break free of the SIPP restrictions (and of course, benefits). Very odd. Why would anyone want to do that anyway?

Dod

[Ma1co1m]

Dod

My understanding is exactly that - under no circumstances should a SIPP be mentioned in a will. A SIPP is outside your estate and therefore SIPP rules apply. Mentioning it in a will brings it under IHT rules.

And I agree, why would anyone do that ?

ma1co1m

[mc2fool]

https://www.ii.co.uk/support/expression-of-wishes#faq6

Well I must say I did not know that, if of course that is correct. I wonder if it is? I was always under the impression because I am sure I was told at some point that it was not possible to direct the funds held in a SIPP to someone via a Will. But maybe that is simply because most of us would not want to lose the benefit of the assets held being IHT free. Sounds weird to me. What you are saying is that at the point of death, a SIPP can suddenly break free of the SIPP restrictions (and of course, benefits). Very odd. Why would anyone want to do that anyway?

Dod

It's not what I'm saying, Dod, but what Interactive Investor is, and the will bit was kinda news to me too. As to why would anyone want to do that, well the answer is obviously to make sure the funds go where they want them too. E.g. that FAQ says (further up) "A charity can only be paid a tax-free lump sum if there are no surviving dependants, and the charity must be nominated by you before your death.".

So the discretionary trust (which is what a SIPP is) will just ignore your wishes if you ask to leave it all to the local cats home while disinheriting your dependant kids, whereas if that's in your will, well, your kids will have to go to court to challenge your will, and may not succeed.

[Dod101]

https://www.ii.co.uk/support/expression-of-wishes#faq6

Well I must say I did not know that, if of course that is correct. I wonder if it is? I was always under the impression because I am sure I was told at some point that it was not possible to direct the funds held in a SIPP to someone via a Will. But maybe that is simply because most of us would not want to lose the benefit of the assets held being IHT free. Sounds weird to me. What you are saying is that at the point of death, a SIPP can suddenly break free of the SIPP restrictions (and of course, benefits). Very odd. Why would anyone want to do that anyway?

Dod

It's not what I'm saying, Dod, but what Interactive Investor is, and the will bit was kinda news to me too. As to why would anyone want to do that, well the answer is obviously to make sure the funds go where they want them too. E.g. that FAQ says (further up) "A charity can only be paid a tax-free lump sum if there are no surviving dependants, and the charity must be nominated by you before your death.".

So the discretionary trust (which is what a SIPP is) will just ignore your wishes if you ask to leave it all to the local cats home while disinheriting your dependant kids, whereas if that's in your will, well, your kids will have to go to court to challenge your will, and may not succeed.

Thanks for all that. Not I think that it will affect me. I expect that II have taken legal advice on all of that since it is quite technical and it is unlikely that they will have made it up. A SIPP comes after all with quite valuable benefits for the next generation and even for a surviving spouse, so I cannot imagine many cases where the beneficiary would want to 'break free' of these. However it is another piece of info to add to what we gather in life I suppose.

If there are no surviving dependents then leaving the funds to a charity via a Will makes sense because the funds will be IHT free anyway but in most other cases, losing the SIPP status would not be advantageous surely?

Dod

[mc2fool]

https://www.ii.co.uk/support/expression-of-wishes#faq6

Well I must say I did not know that, if of course that is correct. I wonder if it is? I was always under the impression because I am sure I was told at some point that it was not possible to direct the funds held in a SIPP to someone via a Will. But maybe that is simply because most of us would not want to lose the benefit of the assets held being IHT free. Sounds weird to me. What you are saying is that at the point of death, a SIPP can suddenly break free of the SIPP restrictions (and of course, benefits). Very odd. Why would anyone want to do that anyway?

Dod

It's not what I'm saying, Dod, but what Interactive Investor is, and the will bit was kinda news to me too. As to why would anyone want to do that, well the answer is obviously to make sure the funds go where they want them too. E.g. that FAQ says (further up) "A charity can only be paid a tax-free lump sum if there are no surviving dependants, and the charity must be nominated by you before your death.".

So the discretionary trust (which is what a SIPP is) will just ignore your wishes if you ask to leave it all to the local cats home while disinheriting your dependant kids, whereas if that's in your will, well, your kids will have to go to court to challenge your will, and may not succeed.

Thanks for all that. Not I think that it will affect me. I expect that II have taken legal advice on all of that since it is quite technical and it is unlikely that they will have made it up. A SIPP comes after all with quite valuable benefits for the next generation and even for a surviving spouse, so I cannot imagine many cases where the beneficiary would want to 'break free' of these. However it is another piece of info to add to what we gather in life I suppose.

If there are no surviving dependents then leaving the funds to a charity via a Will makes sense because the funds will be IHT free anyway but in most other cases, losing the SIPP status would not be advantageous surely?

Dod

Well, unless you think it's worth the loss of IHT freeness to guarantee the SIPP funds go to who/what you want I guess. Like you, not something that'll affect me, I think....

[AdrianC]

To keep things simple, does anyone know how UK tax rules work for a non-UK resident inheriting a SIPP?

Specifically, One of my sons is a long-term US resident. I understand US tax rules are draconian for US residents benefitting from an overseas trust (eg a SIPP). Could the SIPP be cashed in and passed to him as a cash inheritance?

Dealing with this myself. I'm a long-term US resident, dual citizen. Dad was a UK resident, UK citizen. He passed away in December, over 75 years old. We have a solicitor sorting out inheritance tax and probate. I just received an email from Aviva, informing me that I am a beneficiary on dad's drawdown pension. Here's what I've found out:

I can take it as a lump sum, but it will be subject to UK tax withholding*, unless I demonstrate that I have US tax residency.
I will have to pay tax on it in the US as pension income.

Get around the UK tax using IRS Form 6166 – ‘Certification of U.S. Tax Residency’ and ‘Application for Relief at Source from UK Income Tax’ with HMRC.

I must also do the FBAR Report of Foreign Bank and Financial Accounts if over $10k (mine will be).

I'd post links to all this but I'm not allowed.

After getting all that in place I can instruct Aviva to pay the lump sum into my UK bank account.

* Regarding UK tax (emergency tax?), I'm not sure what the rate would be. Does anyone here know?
Some site I found said up to 45%. That is to be avoided.
If it were 20%, I wonder if it would be easier to pay the UK tax and claim a tax credit in the USA? My marginal rate in the USA is 22-24%.

[AdrianC]

Regarding UK tax (emergency tax?), I'm not sure what the rate would be. Does anyone here know?
Some site I found said up to 45%. That is to be avoided.

Answering my own question: "Single or ad-hoc payments, or initial payments of regular pension income, are normally taxed on the ‘Emergency month 1 basis’". So yeah, up to 45% tax rate. On a 50k payment they will deduct over 21k.

It's the same paperwork needed to claim back the tax, so best to get the paperwork in beforehand.

[yieldhog]

I sometimes wonder if it might save a lot of hassle if I take out from my SIPP the maximum up to my 20% rate. Paying 20% now would be better than waiting for a 45% hit. The problem here is that the money taken out will no longer accumulate tax-free. However, if I invested in low dividend, high growth ITs I might be able to recover the 20% tax over a number of years. As things stand, my wife will inherit the SIPP tax free, but my US sons would probably take a big hit if they take money from the SIPP when my wife passes away.