Does HMRC consider Trad IRA to ROTH conversion as taxable?

[bilmar]

I am now somewhat of a dual resident between UK and US so am trying to navigate the best tax strategy when most of my investments are in US.

It appears that HMRC does not tax ROTH distributions so having more of my money in ROTH makes sense but I am not clear if they would tax a Traditional to ROTH conversion the same as US  who consider it 'income' or just ignore it.

Anyone know for sure?

[Playing with Fire UK]

Tough question. I don't know. @Kwill @katekat @UnleashHell might have contact details for a UK accountant who deals with US questions.

Are you definitely resident in the UK for tax purposes? If you aren't / weren't it'll be an easier question.

[UnleashHell]

I'm US taxed only - no contacts for UK accountant.
Sorry.

[bilmar]

Tough question. I don't know. @Kwill @katekat @UnleashHell might have contact details for a UK accountant who deals with US questions.

Are you definitely resident in the UK for tax purposes? If you aren't / weren't it'll be an easier question.

Yes I am true dual resident with home in each country which means that I am US resident for tax treaty but have to file UK taxes too

[Kwill]

I don't know. It'd be worth being really sure before doing anything major. I'm a US citizen but only resident in the UK, so I can't contribute to my IRAs. I'm leaving things alone as much as possible.

[gldms]

OK, here’s thing I was told by someone who does UK/US taxes regarding the UK treatment of Traditional IRA distributions: if you convert the whole trad IRA to a Roth, then it is considered a lump-sum distribution under the tax treaty. This means, under the treaty, that it is liable to US tax but not UK tax even if you are resident in the UK. See  https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a. This “lump sum” thing seems a bit hazy as HMRC seems to consider any non-periodic payment a lump sum, which is great. Regarding another post above, you can certainly contribute to your IRA while living/working in the UK. You cannot deduct your contributions to the Traditional IRA however, unless it was established before you moved to the UK.

[Kwill]

Regarding another post above, you can certainly contribute to your IRA while living/working in the UK. You cannot deduct your contributions to the Traditional IRA however, unless it was established before you moved to the UK.

Whether or not you can contribute to your IRA while working in the UK depends on how you do your taxes. I take the Foreign Earned Income Exclusion, which means that I can't contribute to the IRA unless I have earned income that is not excluded. Occasionally I have a little bit of self-employment income, so I will throw that in the IRA. To properly contribute to the IRA all the time, I'd need to take the foreign tax credit, rather than excluding my foreign income. To me, that is not worth the extra paperwork and trouble. Here is one explanation of how this works, but you can find others.

[bilmar]

OK, here’s thing I was told by someone who does UK/US taxes regarding the UK treatment of Traditional IRA distributions: if you convert the whole trad IRA to a Roth, then it is considered a lump-sum distribution under the tax treaty. This means, under the treaty, that it is liable to US tax but not UK tax even if you are resident in the UK. See  https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a. This “lump sum” thing seems a bit hazy as HMRC seems to consider any non-periodic payment a lump sum, which is great. Regarding another post above, you can certainly contribute to your IRA while living/working in the UK. You cannot deduct your contributions to the Traditional IRA however, unless it was established before you moved to the UK.

Interesting doc but still not that easy for me to decipher.

• It seems to say that nominating a beneficiary is a bad idea -luckily I have not done so . Better to leave it to the Will
  
  
• It also suggests to me that a Trad IRA distribution would only be taxed in the US. Am I reading that right?
  
  
• The text also seems to mistakenly say that Trad IRA distributions MUST happen before age 70.5  but reality is that is when RMD's start.
  
  

The new Agreement takes precedence and this will mean that no liability will arise until it would have done so under US tax law. Under US law, this will be when distributions are made. As indicated above, this will generally not be before age 591/2 but must be before age 701/2. The important point to note is that income will no longer be assessable in the UK on the basis of income arising within the IRA.. Any case of doubt or difficulty should be referred to HMRC, Customs & International, Tax Treaty Team.



I could not find a definition of Lump sum so  my original question stands but if I don't convert my Trad IRA funds before RMD kicks in and boosts my US income then perhaps this is a non issue if the RMD is not taxable in UK too

Should I do as they suggest and reach out  to HMRC, Customs & International, Tax Treaty Team or am I poking the bear?

I have tried talking to a couple of so-called expat tax specialists and they both knew all about expat taxes and how to move from one country to the other but were very hazy on treaty issues related to dual residency.

Bill

[gldms]

Under the old (pre-2003) rules, it appears that assigning a beneficiary would make your IRA a type of trust that would be UK-taxed as capital gains arose,  even if no distributions were made. That’s a nightmare.
Fortunately, that is no longer the case. 

As far as I can tell, the UK defines a lump sum as any non-periodic payment. Under this liberal definition, most one-off distributions from your IRA would be taxable in the US only. If you were taking regular RMDs, then HMRC might start to get interested. The US doesn’t seem to really have a lump-sum concept any more; however, if it does, it would affect the taxation of your UK tax-free 25% lump sum distribution from your UK pension. One could argue that that distribution is a “lump sum”  and therefore would not be “general category income”  on form 1116. That would not be good as you would not be able to carryover unused foreign tax credit from previous years  to offset your US tax liability on your UK-tax free lump sum distribution.  Because of this ambiguity (and because you can only carry over the past 10 years of unused foreign tax credit, anyway) I strongly urge any US citizen who works in the UK and is accumulating a UK pension to (1) always use form 1116 (foreign tax credit) and never use 2555 (Foreign earned income exclusion) (2) Include your, and your employer’s contribution to your pension in your total income on 1040. In other words, don’t deduct your UK pension contributions from your UK income, even though the treaty allows you to.  The object of the game is to build up a large cost-basis in your UK pension so that the  lump-sum pension distribution will be US tax free regardless of what a “lump sum” is supposed to mean. Many people screw this up and end up having to move their UK pension to Malta or  something because they find they have a big us tax liability on their uk tax-free pension lump sum distribution when they retire.

[jim555]

Another site forum has someone who is asking about Roth conversions:
https://talk.uk-yankee.com/index.php?topic=97389.0