UK/USA Tax Treaty Article 17.1 - regular periodic pension payments/annuities are not taxed in the state when the pension is based but in state of residence (except government sponsored pensions).
UFPLS, Triviality (small pensions) and Flexible Drawdown:
These are pension LUMP SUM payments and not periodic payments. Article17.2 states that lumps sums are taxed in the state where the pension is based in i.e. UK pension in UK etc and not where you are resident.
In practice - Triviality Pensions:
i.e. small pension fund values of £30k for private pensions and £10k for company money purchase schemes: Pension Company will withhold 'basic rate' taxes in UK and then upon completion of a HMRC Double Tax (Individual) form called US Individual which is sent to the IRS in USA and then you return it to HMRC: HMRC will refund all taxes withheld and tax is fully payable in USA.
In practice: Pension Fund larger than £30k/£10k Triviality e.g. Flexible Drawdown:
if it does not fall under Triviality commutation lump sum rules then it is fully taxable in UK. When the pension provider pays out funds they must withhold 'emergency tax' e.g. if you withdraw £40k as a 'one off' - much of it will have tax withheld at 45% as they tax you as if you are receiving pension of £40k per month!
Taxes are still payable in the UK but we then reclaim any over paid taxes given that it was a 'one off' £40k payment and not £40k pm.
Must complete HMRC R43 special form for USA – to reclaim tax. If UK national you are entitled to UK personal allowance, if non UK national then no PA. The rest is put through for that tax year as normal income in UK for tax.
HMRC will then confirm that the correct tax has been paid. You then send this notice to IRS and ask not to be double taxed.
Whether trivial or not – in all circumstances you still need to declare in USA and give details of tax retained by UK to get a tax credit in USA.
Tax Free Cash Lumps are treated entirely different - see our next video ...