SIPP distribution on death

[USUK]

Spouse and I are both dual citizens of UK-US. Domiciled in US. Lived here for over 30years.

Spouse passed away in 2023, aged 63. He owned a SIPP which was funded by a rollover from an Executive Pension Plan he had back in the 1980's when he had a small one-man band PLC. No tax deductions were ever taken in the US for these contributions, as the pension was effected before we immigrated to the US.

Upon his death, the SIPP paid out to me as his 100% beneficiary, tax-free in the UK.

How will this be treated in the US from a tax perspective? It is not a 25% commencement "lump sum" distribution. The whole SIPP was closed and paid out to me. Do I treat it as an inheritance? Do I report it as taxable income in the US? It's seemingly impossible to find anything online that discusses anything other than the 25% lump sum distribution to the holder of the SIPP. My question is about inheriting the SIPP as a spouse.

My accountant in the US is confused about this and has gone AWOL. I am on extension for filing until October but want to find a definitive answer so I can advise a new accountant.

[Seasider]

I assume you have read this (which does go on about the 25% lump sum and has couple of glaring errors on the UK stuff)
https://brighttax.com/blog/us-uk-pensio ... provision/
But it seems to me the bit about pensions only being taxed in the country in which they are based would still be relevant to your situation. Of course I do get confused as to when a double tax treaty will apply but if I were you I would refer your US accountant to article 17(1)(b) and see what they think.

[USUK]

@seasider

Yes, I've read that along with numerous other articles. There seems to be arguments for and against using 17(1)(b), but a general consensus from the large tax/accounting firms, and a memorandum from the IRS, that the lump sum is not covered as the savings clause does not exempt it.

However, I can't find anything that specifically makes reference to an inheritance from a SIPP. Most articles seem to relate to the SIPP holder taking the commencement lump sum.

[Seasider]

If there is a memorandum from the IRS then I guess it would trump anything you may get from anyone else!

It is undoubtedly the case that what you received from the SIPP is a lump sum.

I would be a lot happier if the US could not ignore paragraph 2 of Article 17 because I think you would fall squarely within it.

What the saving clause does is to say the US can ignore paragraph 2 for US citizens but it cannot ignore paragraph (1)(b).

Personally I think the natural reading of the references to "pension or remuneration" in paragraph 1 would be to cover income benefits and not lump sums. But I think Article 17 (2) could be used as a way of arguing that 17 (1)(b) also applies to lump sums because it starts off by saying "Notwithstanding the provisions of paragraph 1 of this Article" which implies that if paragraph 2 did not exist then paragraph 1 would apply to lump sums. What is the point of the Notwithstanding language if paragraph 1 did not apply to lump sums anyway?

But I know next to nothing about UK tax and pensions and even less about US tax these days. As I say if there is an IRS memorandum which covers this issue then arguing against it is going to waste a lot of time and money with no good end result.

[abisgran]

In the uk if sipp holder dies before age 75 his nominated beneficiary inherits the whole sipp tax free.

[Laughton]

From Google:-

Do I pay US tax on UK inheritance?
No, the IRS does not impose taxes on foreign inheritance or gifts if the recipient is a U.S. citizen or resident alien. However, you may need to pay taxes on your inheritance depending on your state's tax laws

and

How much can you inherit without paying taxes in USA?
There is no federal inheritance tax. In fact, only six states tax inheritances. There is a federal estate tax, however, which is paid by the estate of the deceased. In 2024, the first $13,610,000 of an estate is exempt from the estate tax.9 Feb 2024

and

Do I have to pay tax on money transferred to the USA?
Recipients of foreign inheritances typically don't have a tax liability in the United States. And, if you're sending your own money from a foreign bank account to a domestic one, you won't have to pay taxes on the transfer.

and from a firm of US lawyers:-

https://www.districtofcolumbiataxattorn ... o-the-irs/

Hope the above is of some help. Not sure what State you live in - hopefully not Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania.

Is this even an "inheritance"? Is the SIPP not effectively written in trust and outside of the deceased person's estate?

[USUK]

@laughton

Thank you for this information. Of course, I'm still none the wiser! The tax attorney is a good resource, thank you! I may contact him and determine if he can at least give me some information at a reasonable cost. We are not talking millions of dollars here in this SIPP!!

I know that in the US, spouses pass their estates tax free spouse-spouse under the $13MM threshold. We are no-where near that, so I know that part. The question is - how is the SIPP distribution upon death considered from a tax perspective. Is it considered income to the beneficiary? In the UK, it is 100% tax free; however, as a SIPP is similar in nature to an IRA, does this distribution become a taxable event to a spousal beneficiary, the way that an American IRA would be if it was cashed out in full. Am I making sense?

[AdrianC]

I inherited a pension from my father, but he was 82 and had been taking distributions. It was fully taxable in the UK. I was able to claim the UK tax back under the UK-US tax treaty.

My US accountant felt that this was not taxable income in the USA. I argued that it would have been taxable in the UK, and the IRS was aware of something goin on, since I had to apply to them for a US residency stamp to get back the UK tax. I instructed the accountant to include it as other income on our tax return and we paid tax on it at US rates.

Using this same reasoning, yours wasn’t taxable in the UK, so maybe shouldn’t be in the USA? Be interesting to get an IRS ruling on it. Not sure how to go about that, other than submitting your return without it and seeing what happens.

You will have to file an FBAR and maybe a 3520 with the IRS.

Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service
https://www.irs.gov/businesses/small-bu ... ounts-fbar

https://www.irs.gov/instructions/i3520