Is UK Cross-Border Retirement Income Taxable Under US Treaty

Is UK Cross-Border Retirement Income Taxable Under US Treaty

US-UK Cross-Border Retirement Treaty US Tax Rules

The United States and United Kingdom have a tax treaty in place — and that tax treaty provides a detailed summary about how foreign retirement is taxed for US Persons, UK Nationals, and other residents — depending on the type of retirement plan at issue. In general, when it comes to cross-border retirement tax rules, if there is a tax treaty in place — it will significantly impact the outcome of how certain residents and citizens/nationals are taxed on the resulting income — including how contributions and growth are taxed as well. In discussing retirement and pension income taxation, they are typically three (3) buckets of retirement that taxpayers may have — depending on what sector they worked in (Public vs Private) and what type of investments they have. The three larger categories of retirement income include:

          • Private Pension;

          • Public Pension; and

          • Social Security

Let’s explore the basics of How US Treaty Taxes UK Cross-Border Retirement & Pension

Article 17 (1) Private Pension

      • a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

        b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

Private Pension Article 17(1) is Taxed by Country of Residence

In general, private pensions are taxed in the country of residence. Therefore, if a US person who is also a UK Citizen, National or former Resident receives income from a foreign pension plan in the UK, the United States has the opportunity to tax that income — because the United States is the country of residence. Thus,  the UK would also have an opportunity to tax the income as well — because private pension Paragraph (1) is not excluded from the saving clause.

BUT, if the pension income would be exempt in the other state (so for example a tax-exempt Roth IRA) then when it is paid to a UK resident, it would also be tax-exempt in the UK just as it would be tax-exempt in the US.

Private Pension Not Excluded by Saving Clause

While the saving clause excludes several of Article 17 paragraphs in the tax treaty between the United States and the UK from the Savings Clause, which deals with private pensions — Paragraph (1) involving annuities, which is the most common type of foreign pension, is not excluded from the saving clause — and therefore general tax rules in either Country would apply. 

Article 17 (3) Social Security

      • Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State

Social Security Article 17 (3) is Taxed at Source

Since Social Security is paid by the government, it would make sense that only the Government that serves as the source of the Social Security would have the opportunity to tax that income.

Exempt From Saving Clause

Social Security is exempt from the saving clause — which means that the information provided in the tax treaty regarding Social Security would be the “final word” on how Social Security is taxed by either country party to the agreement.

 Article 19 Government Pension

      • a) Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention: a) any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall, subject to the provisions of subparagraph b) of this paragraph, be taxable only in that State;

        b) such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

Government Pension at Source Unless Resident or Citizen of Other Country 

As with most tax treaties, the information involving government pensions in the US/UK Tax Treaty is a bit complicated and contains certain exceptions/exclusions — which is often found in other tax treaties as well. In general, public pensions are taxed by source and therefore the general proposition is that a pension that is being paid as a result of government service in one country shall have the only opportunity to tax the income.

But, the treaty goes on to explain that it is actually the other country of residence that has the exclusive right to tax the pension if the person receiving the pension is a resident or national of the other country (exceptions, exclusions, and limitations apply).

Saving Clause Limited Exemption

The Saving Clause further clarifies that while Article 19 is excluded from the saving clause — it is only for people who are neither citizens nor have any other immigration status in the country. 

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