Because the US has a citizenship-based taxation system, income earned abroad is subject to federal taxation regardless of the income source. Then again, earnings on certain qualified US retirement funds receive preferential tax treatment; so, the question naturally arises: do any foreign retirement funds get special treatment in US taxes? If you’re a US expat in the UK and you have a Self-Invested Pension Plan (SIPP), then we have the information you need so you can best manage your US tax liability.
Is the SIPP Protected by the US-UK Tax Treaty?
Because earnings of a US expat in the UK are subject to taxation by both nations, the two countries entered into a tax treaty that determines what income is taxable by each. Any income sources that are not covered by the treaty are generally subject to both nations’ tax rules. Though your SIPP is a retirement plan by design, it will only receive protection under the tax treaty if it is “wrapped” as a pension plan in the UK, meaning it complies with certain rules.
If the SIPP is covered by the tax treaty, you still need to determine if you want to claim protection. If you do, then contributions and gains will not be taxed until distribution. If you do not claim protection, then contributions and gains are reportable, but you may get a Foreign Tax Credit on your US taxes. Thus, you should review your options carefully – don’t assume treaty protection will lower your tax bill.
Other SIPP Considerations for a US Expat in the UK
Most SIPPs are considered grantors trusts and require additional reporting. Review Forms 3520 and 3520a to determine whether or not the additional al reporting applies to you.
Finally, note that your trust may include Passive Foreign Investment Companies (PFICs), which typically require additional reporting. However, the Treasury Department issued regulations that exempt PFICs in your SIPP from these requirements, whether or not the account is under treaty protection.
Greenback is Here to Help
As always, we have expert accountants on hand who can help you understand the tax implications of a SIPP for a US expat in the UK, and decide on the best strategy to reduce your tax liability. So if you have questions, don’t hesitate to reach out!