U.S. TAX GUIDE IN THE UK
Do you need to report your UK pension on your US tax return?
Yes, as a US citizen or Green Card holder with a UK pension, you must report it on your US tax return. Here’s what you need to know:
When do you have to report your UK pension as a Foreign Trust?
You don’t have to file your UK pension as a foreign trust if your employer contributes more than you do. In such cases, just report the balance on your FBAR and Form 8938.
What if you contribute more than your employer?
If your contributions exceed your employer’s, you might need to comply with more complex US tax requirements. Generally, if the pension is not contract-based and your contributions are greater, it is treated as a Foreign Grantor Trust and must be reported on Forms 3520 and 3520-A.
How are contributions compared over time?
Total contributions over the life of the pension are compared, not just a single year. If your employer’s contributions are the majority overall, you don’t need to file it as a Foreign Grantor Trust.
What is the difference between contract-based and trust-based pensions?
Contract-based pensions are not considered Foreign Grantor Trusts, so Forms 3520 and 3520-A are not required, even if your contributions are higher than your employer’s.
How does the US-UK tax treaty affect your pension reporting?
The US-UK Tax Treaty allows you to report contributions and growth on your tax return, often resulting in no current-year tax due to foreign tax credits. When withdrawing from the pension, the money is no longer subject to US taxation if it has already been reported as income.
Will the IRS tax the 25% lump sum from my UK pension?
Yes, the IRS will tax the 25% lump sum you take tax-free from your UK pension.
When does a Foreign Trust become a Foreign Grantor Trust?
A foreign trust becomes a Foreign Grantor Trust when your contributions exceed your employer’s. It must be reported on Forms 3520 and 3520-A. If it’s covered by the US-UK Tax Treaty, its income is tax-exempt and doesn’t flow through your tax return.
How and when do you file Form 3520-A?
File Form 3520-A with the IRS by March 15 each year. You can request a six-month extension by submitting Form 7004. Foreign Grantor Trusts also need an Employer Identification Number (EIN). Obtain an EIN by calling the IRS. Late submissions incur a minimum penalty of $10,000.
When do ISAs become a problem for American expats?
ISAs (Individual Savings Accounts) are popular in the UK, but they can be problematic for US citizens or Green Card holders depending on the type:
- Cash-Based ISAs: Report the value on your FBAR or Form 8938, and interest earned as income on your US tax return.
- Stocks and Shares ISAs: These are taxed more heavily by the US and are considered Passive Foreign Investment Companies (PFICs), requiring additional reporting and potentially higher taxes.
Is it worth having a Stocks and Shares ISA as a US expat?
The benefits of a Stocks and Shares ISA are often outweighed by US tax compliance costs. The IRS taxes PFIC profits, even if unrealized, meaning you owe taxes on paper gains. Cash-based ISAs are generally a better option.
What about a Lifetime ISA?
A Lifetime ISA (LISA) can be cash-based or stocks and shares-based. If it’s cash-based, no PFIC filing is required. Stocks and shares-based LISAs may require additional reporting and potentially higher taxes due to PFIC status.
