US Citizens inheriting SIPPs

[yieldhog]

My two sons are dual UK/US citizens. When the last of my wife and I dies, they are named on the SIPP Trust as 50/50 inheritors of the SIPP. One is resident in the UK, the other in the US.

My understanding of UK tax is that my UK resident son can inherit his share of the SIPP free of inheritance tax but he will be taxed in the UK as UK income on any withdrawals from the SIPP. Because US citizens are taxed on worldwide income, he will need to declare the SIPP income on his US tax return but the US/UK tax treaty may allow for avoidance of double taxation.

For the US resident son I'm not sure what the SIPP UK tax liability will be. My understanding is that the US tax treatment of foreign trust income can be draconian. To complicate matters, I set up a US trust for my US resident son and the SIPP income could possibly be paid to the trust if it was deemed to be advantageous for tax purposes.

Has anyone on TLF had any experience with US citizens inheritance of a SIPP?

I will be contacting my UK broker to find out what UK tax treatment will be in this situation. Indeed, if they will allow a US citizen to own a UK SIPP (doubtful).

Any insights welcome.

Y

[Dod101]

If the owner of the bequeathed SIPP was under 75 on his/her death, the beneficiary can have tax free access to the SIPP assets as far as HMRC is concerned.

Dod

[Charlottesquare]

I suspect you will not get much advise from UK SIPPS about how the USA (and maybe individual states) will view leaving SIPPS to UK residents, they will likely not want the legal exposure so advising, I accordingly suspect you will need to pay someone like David Treitel who covers both sides of the pond tax wise for his advice. (www.americantaxreturns.co.uk)

My concern would also be finding out how dealt with in a particular state, whilst not particularly looking at SIPPS I was at the weekend having a browse as to how our leaving money to our son (now a USA resident for tax) would work, I got as far as nationally there did not appear to be a USA IHT but if he say moved to Maryland from New York (which is likely as his US in-laws live there) then there seems to be some form of estate duty that might bite (seemed to have some family reliefs). Whilst I suspect I can currently get a steer from his in laws re US tax (they are a bit older than we are) I also suspect we will need to pay someone to cover the US angle whilst we are still competent to follow what the pros say and whilst I still understand UK IHT to some degree (still early 60s) as I know when I retire in a couple of years my tax knowledge will go out of date very fast.


If significant money I would pay for advice.

[scrumpyjack]

If the owner of the bequeathed SIPP was under 75 on his/her death, the beneficiary can have tax free access to the SIPP assets as far as HMRC is concerned.

Dod

It seems HMRC plan to abolish that!

https://techzone.abrdn.com/public/pensi ... ens-so-far

[Dod101]

If the owner of the bequeathed SIPP was under 75 on his/her death, the beneficiary can have tax free access to the SIPP assets as far as HMRC is concerned.

Dod

It seems HMRC plan to abolish that!

https://techzone.abrdn.com/public/pensi ... ens-so-far

I have never understood why the benefits are tax free to an inheritor if the owner died before 75. A good friend of mine’s husband died unexpectedly at I think it was 73 and the widow has been able to withdraw sums as and when she liked tax free ever since. Good luck in a sense to her but it seems entirely arbitrary and I cannot see the logic and neither can she!

Dod

[Charlottesquare]

It seems HMRC plan to abolish that!

https://techzone.abrdn.com/public/pensi ... ens-so-far

I have never understood why the benefits are tax free to an inheritor if the owner died before 75. A good friend of mine’s husband died unexpectedly at I think it was 73 and the widow has been able to withdraw sums as and when she liked tax free ever since. Good luck in a sense to her but it seems entirely arbitrary and I cannot see the logic and neither can she!

Dod

Could be a throwback to old style RARs where one could bounce a life insurance element through the scheme, in addition at one time some people had pensions as mortgage repayment vehicles, like my first mortgage had an endowment policy to cover either my death or eventual repayment (it ended up buying me a small fishing boat and paying of the loan for my wife' MSc.)

I have told my spouse to loot my SIPP 100% asap if I keel over , given the bird in the hand maxim etc.

[Lootman]

My concern would also be finding out how dealt with in a particular state, whilst not particularly looking at SIPPS I was at the weekend having a browse as to how our leaving money to our son (now a USA resident for tax) would work, I got as far as nationally there did not appear to be a USA IHT but if he say moved to Maryland from New York (which is likely as his US in-laws live there) then there seems to be some form of estate duty that might bite (seemed to have some family reliefs).

I cannot speak about how a UK pension would be regarded in the US. But it is my understanding that inheritance tax in the US (which is called estate tax there) works similarly to IHT in the UK. But crucially with a much higher nil rate band, in the millions, meaning that most people do not need to worry about it.

And individual states may have their own estate tax, as you note.

There is also some kind of gift tax, but I do not know anything about that other than that it exists.

[yieldhog]

Thank you all for replies so far.
I am over 75. MY US-resident son lives in Florida.
I have a very good US attorney who has been very helpful in setting up an American trust for the Florida resident. From what I gather, from 2024 Florida residents can inherit up to $13.61 million without any estate tax/inheritance tax. This much is clear from the US side. However, what I'm not clear about is how the SIPP assets would be classified from both the US and UK side. If they are classified from the US side as a distribution from a foreign trust then there could be adverse tax consequences. If the SIPP were to be liquidated and turned into cash deposits before transmission to the US recipient or a US trust, would the money still be considered a distribution from a foreign trust? In addition, if the SIPP was liquidated before transmission to the US, how would the UK tax office see the liquidation - as a UK taxable event and if so who would pay the tax due and what would it be?

My US attorney is part of a worldwide network of specialist tax attorneys and I might be able to get its UK offices to advise on the issues involved but the fees can easily mount up to tens of thousands, as I found out from the US side. At the end of the day I don't want to spend more on attorneys than I (or my estate) would be liable for in taxes.

First I will contact my UK accountant and UK solicitor to see if they can shed any light on the issues without running up exorbitant charges.

Y

[yieldhog]

As I continue to research this issue I'm finding new information and will report it here as and when it arises.
Yesterday, I found some information about QROPS (Qualified Recognised Overseas Pension Scheme). It appears that at one time the UK government recognised certain overseas pension arrangements that effectively allowed transfer of SIPPs to other countries without triggering a taxable event in the UK.
Over the years, the schemes gradually disappeared until now there are none left. I understand the reason they disappeared was they no longer met the UK requirements. What I don't yet understand is why there are literally hundreds of these schemes operating in many countries worldwide other than America. Australia has most but I'm not yet sure why. Does anyone Know?

Y

[Adamski]

Couple of ideas.. 1) you need a UK bank account to withdraw from a UK pension. So your US-resident son would need to keep one open, if not done so already. 2) option, could drawdown tax free element of sipp, and maybe some more, gift to US-resident son now, and change beneficiary to uk-resident son only, to avoid complications.

[yieldhog]

Couple of ideas.. 1) you need a UK bank account to withdraw from a UK pension. So your US-resident son would need to keep one open, if not done so already. 2) option, could drawdown tax free element of sipp, and maybe some more, gift to US-resident son now, and change beneficiary to uk-resident son only, to avoid complications.

Hi Adamski,
They are good thoughts but a couple of snags in my particular case. Almost all of my SIPP tax-free cash was taken out about 15-years ago and none remains now. The other snag is that as a US/UK dual national my younger son who lives/works in the UK is still liable for US tax. I'm starting to think the only way out of this dilemna is to get my wife to start cashing in the SIPP after I die but only cash in up to the max allowed within the basic rate UK tax band which including other income is currently around £50k. So if after my death her income drops to, say, £30k then she could take out of the SIPP about £20k and pay UK tax within the 20% band. At least that would be better than the 40%+ that she might pay if she took out more. The money taken out could be reinvested in growth shares that pay minimal dividend.
I'll continue to try to find a better solution.
Y

[Charlottesquare]

As I continue to research this issue I'm finding new information and will report it here as and when it arises.
Yesterday, I found some information about QROPS (Qualified Recognised Overseas Pension Scheme). It appears that at one time the UK government recognised certain overseas pension arrangements that effectively allowed transfer of SIPPs to other countries without triggering a taxable event in the UK.
Over the years, the schemes gradually disappeared until now there are none left. I understand the reason they disappeared was they no longer met the UK requirements. What I don't yet understand is why there are literally hundreds of these schemes operating in many countries worldwide other than America. Australia has most but I'm not yet sure why. Does anyone Know?

Y

Were there not scams with these where the broker who arranged dipped his/her beak somewhat generously in the funds being switched?

[yieldhog]

Were there not scams with these where the broker who arranged dipped his/her beak somewhat generously in the funds being switched?

I'm not aware of any specific scams, but where there are large sums of money crossing borders I'm sure there will be scammers ready to take advantage. In the case of QROPS I did read that the UK goverment withdrew approval for all the US schemes because they did not want to appear to be endorsing specific schemes, but that doesn't really ring true to me, and why would they still approve hundreds of Australian
schemes? I will continue to try to get to the bottom of this.

Y