Non-UK resident SIPP Inheritance

[AdrianC]

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.

As far as I understand, if your US son does the paperwork right, they will only pay tax in the US. And US tax rates tend to be lower. I'm at a marginal rate of 22%. Once I retire fully, I should drop to 12%.

If you pull the money out now it will add to your estate, and inheritance tax in the UK is (to my mind) ridiculous at 40%.
And even more ridiculous, my brother and I have to come up with the cash to pay the IHT before we can access the funds in the estate. That is just stupid.

I'll update this thread when I have it all sorted out.

[yieldhog]

As I understand it, a US person benefiting from a foreign trust is subject to draconian taxation, but I haven't yet quantified exactly what the "draconian" tax amounts to.

If, on the other hand a US person inherits foreign cash/shares they will be tax free up to the US inheritance tax limit of $2.92 million (2023)

[Lootman]

As I understand it, a US person benefiting from a foreign trust is subject to draconian taxation, but I haven't yet quantified exactly what the "draconian" tax amounts to.

If, on the other hand a US person inherits foreign cash/shares they will be tax free up to the US inheritance tax limit of $2.92 million (2023)

I do not know anything about how the US treats overseas trusts and pensions. But the federal nil-rate band for estate tax is $12.92 million and not $2.92 million! And double that for a married couple:

https://www.foley.com/en/insights/publi ... d%20couple).

Note: Some US states have their own state estate tax as well.

[yieldhog]

Sorry for the typo. Yes it should have said $12.92 million.

[TedSwippet]

As I understand it, a US person benefiting from a foreign trust is subject to draconian taxation, but I haven't yet quantified exactly what the "draconian" tax amounts to.

You might be thinking of PFIC. "Draconian" is a worst-case tax rate of 100% or more of your gains.

However, it does not apply to things held in pensions, including non-US pensions protected by treaty. The US/UK tax treaty protects pensions. (There are some grey areas around SIPPs, but an assertive reading of the treaty includes them, and I'm not aware of any instances where the IRS has disagreed.)

If, on the other hand a US person inherits foreign cash/shares they will be tax free up to the US inheritance tax limit of $2.92 $12.92 million (2023)

You have this the wrong way around. The US estate tax is levied on the estate of the deceased, not on the recipient. Apart from one nasty and spiteful exception -- and one that almost certainly won't apply here -- US resident gift and bequest recipients are not liable for any US tax on the amount received, no matter how high the amount or whether or not it is US or non-US source.

[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.

Updating this: I was able to get the payment from Aviva, but they deducted emergency tax. I put in a claim with HMRC to get the tax back - Form R43 - and just received a letter from HMRC saying "you do not have to pay tax on the pension income included in your claim", "you are due a repayment of tax" and "you'll shortly receive a P800 tax calculation".

Don't know what "shortly" means to them, but it is very promising. I'll have to pay tax on the full amount in the USA (at 22% rather than 42%).
Hoping I get the repayment before year end.

[yieldhog]

Thank you for comments. They are very helpful.

I should have clarified my comment about draconian tax on foreign trusts. I believe this would only apply to income from the foreign trust, which would only occur if the US resident took a lump sum or income from the SIPP. For example, if my US son inherited the SIPP and started receiving a regular income frm it, this income could be highly taxed. This does raise the


question as to whether a US person, son or otherwise, could be the beneficiary of a UK SIPP.

I will need to go back to my conversations with my US tax attorney about these issues to see if I can find some clarity and get back to you as soon as I can.

Thanks again,

Y