UK resident is in receipt of a US pension for which Federal tax was deducted at source, presumably under the Savings Clause. DTA between US and UK states in Article 17 that it has to be reported in the UK, and Article 24 states that the tax paid in the US can be reclaimed. Spoke to HMRC - technical team, one advised me that I am correct, the other advised me that I am incorrect. The latter claims that I can deduct 10% at source of the US pension received (as per Foreign Notes 13/14 FN10) and further claim the US tax suffered in the 'Foreign tax paid or taken off'. Who is correct?
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Treaty
According to Article 17(1)(a) "Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State". Thus it should not suffer US tax. So it is incorrect to claim double tax relief and the taxpayer must reclaim the tax from the US. I believe the 10% relief can be claimed in the UK.
If your client is subject to UK tax on the arising basis, the UK has primary taxing rights; and the pension income is only subject to UK tax (subject to the 10% reduction).
The only exceptions for a taxpayer on the arising basis would either be if the US pension income was for US government service or was a lump sum distribution.
If your client is a non-resident alien, the client will need to file a US income tax return (form 1040NR) to reclaim the US tax withheld. If the client is a US citizen or green card holder or resident, the pension income remains taxable in the United States, but the client claims credit for UK tax paid under Article 24 of the tax treaty.
David Treitel | Managing Director | American Tax Returns Ltd
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