Lifetime allowance and Non-residence

Lifetime allowance and Non-residence

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I have a potential client coming in later who is resident in the United States and has been for many years.

He has just started receiving his UK state pension (in 2015-16) and private pension (tax free lump sum in 2015-16 and monthly payments in 2016-17).

I assume that neither of these will be taxable in the UK (DT 1927).

In respect of the monthly pension payments, tax is being deducted at source and I assume that we will be able to stop this by writing to HMRC (FICO, Nottingham appears to be the place, although I don't have an address).

The Lifetime allowance capital value is £1.5m and exceeds the lifetime allowance of £1,250,000. Is the tax penalty still payable even through the taxpayer is non-resident? 

 

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By David Treitel
24th Aug 2016 14:56

Have you tried Forms 8802? and US-Individual
Article 17(1)(a) of the US/UK treaty states that pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
Sub-paragraph 1(b) paragraph states that “notwithstanding sub-paragraph (a), that 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. Consequently, the words of the treaty imply (although are not certain) that an individual who is a resident of the United States (within the meaning of Article 4(4) of the Treaty) will not be subject to United States income tax on the 25% of pension payments that are tax-free in the UK (including those using flexi-access drawdown or taking uncrystallised funds pension lump sum payments, providing that one argues that these are periodic payments as against non-periodic payments).
If the client chooses to take a complete distribution of the plan, the payment will arguably fall within Article 17(2) and only be taxable in the United Kingdom, unless the client is a US citizen in which case the payment will continue to be charged to tax in the United States by virtue of the treaty’s saving clause.
The treaty has no effect on the treatment of any payments for the purpose of the Net Investment Income Tax, tax in some States of the United States, and information reporting such as an FBAR and Form 8938.
If the treaty applies, the client will complete “Form US-Individual 2002” (https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...) to request an “NT” code.
The client will also complete Form 8802 http://www.irs.gov/pub/irs-pdf/f8802.pdf, pay the user fee and send it to the IRS in Philadelphia. This Form requests that the IRS prepares Form 6166, which is the Certificate of US Residency that the IRS will prepare sends internally to HMRC to verify that the client is a US resident.
When the IRS receive the Form 8802 they will send it to HMRC, together with the Form 6166 confirmation of the client’s US residency (this is discussed here: http://www.irs.gov/Individuals/International-Taxpayers/Form-6166---Certi....)
The client will naturally need to continue to file decent quantities of paperwork each year such as Forms 1116, Schedule B, 8938, FinCEN 114, possibly plus 8833 and 3520-A and 3520 and 8621 as a part of any annual filing obligations in the United States.
David Treitel | Managing Director | American Tax Returns Ltd
The Old Exchange, 12 Compton Road, London, SW19 7QD
Tel: 020 3542 6330
Email: [email protected]

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