How the US taxes your UK SIPP

A SIPP is a personal pension, and the notes exchanged with the US-UK treaty list personal pension schemes among the arrangements it treats as pension schemes. That puts a SIPP inside the treaty's pension article in a way no ISA can be. Two paragraphs of that article survive the saving clause for a US citizen, the clause that otherwise lets the US tax its citizens as if the treaty did not exist. Neither was written with a SIPP you fund yourself in mind.

Growth

Article 18(1) says the income a pension scheme earns can be taxed as yours only when it is paid out. It is written for a scheme established in the other country from the one you live in, which a UK SIPP is not while you live in the UK. The US Treasury's technical explanation of the treaty nonetheless says a US citizen resident in the UK "will not be subject to tax in the United States on the earnings and accretions of a U.K. pension fund". That is the US government's own account of the treaty, which is why it carries weight, and nothing published since reconciles it with the treaty's wording. Once you live in the US, Article 18(1) fits a UK SIPP on its plain words.

The funds inside are a separate question. IRS regulations excuse a member of a treaty-protected pension fund from filing Form 8621 for the funds it holds, but they do not say the PFIC tax falls away. Individual shares, which are not PFICs, avoid the question.

Contributions

The treaty relieves contributions only through a job. Article 18(5) lets a US citizen resident in the UK deduct or exclude contributions to a UK scheme, and leaves employer contributions off US income, where they are attributable to employment with a UK employer, up to what a comparable US plan would allow. The technical explanation narrows that paragraph to employer schemes. Neither the treaty nor the explanation extends it to money you pay into a SIPP from your own savings, so the UK tax relief on those contributions has no treaty route onto a US return. Employer contributions paid into a SIPP sit on the same thinner ground as a group personal pension; see how the US taxes your UK workplace pension.

Drawdown

The technical explanation states that a US citizen resident in the UK who receives a pension is subject to US tax on it. UK tax paid on the same income can be credited against the US bill, as the treaty page explains.

The 25% tax-free lump sum is where the two systems part. Article 17(2), which would leave a lump sum to the UK, is not one of the saving clause exceptions, and HMRC's own treaty manual concludes that "the US can tax lump sums received by US citizens from UK schemes". The technical explanation says the same. A lump sum that is tax-free in the UK leaves no UK tax to credit against the US bill on it.

Reporting

A SIPP is a contract with a provider rather than a trust, so the foreign trust forms arise far less often than for a trust-based workplace scheme; see Form 3520 and your UK pension. It still counts elsewhere. The FBAR's exemption for retirement plans names only US plans and IRAs, and Form 8938's instructions ask for your interest in a foreign pension plan at its year-end value; see the FBAR and Form 8938.

The case for a SIPP therefore rests on growth, on the Treasury's reading, rather than on relief going in. For who will open one, see the SIPP eligibility page.

Sources

• US-UK income tax treaty, 2001
• Protocol amending the treaty, 2002
• Exchange of notes on the treaty, 2001
• US Treasury technical explanation of the treaty and protocol
• HMRC Double Taxation Relief Manual, DT19853
• IRS instructions for Form 8621
• IRS instructions for Form 8938
• FinCEN, FBAR filing instructions