Let’s start by saying we do not recommend a move to a QROPS for a current USA tax resident. That is to say, if you have transferred to a QROPS before you moved to the US, then there is an understanding that may be okay, but it has to be declared as a foreign trust (Form 3520-A) with all the tax implications of that status.
However, if you are already a US resident then the IRS will not confirm in correspondence that a transfer from a UK pensions to an overseas QROPS would qualify as an “eligible rollover distribution (Section 402c)”. If it does not then the transfer should be declared to the IRS and the whole amount will be subject to US income tax.
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QROPS a good idea for the USA?
Let us be up-front and say QROPS transfers have not been tested through the courts and so this is a grey area. However, overseas trustees, such as those in Malta, often ask for “waivers” to be signed confirming that they are not liable for any future tax claims by the IRS and not responsible for the actions of those transferring; it is this fact alone that leads us to conclude that whilst a transfer to a QROPS is not wrong, it is extremely high risk.
We believe that risk is also an unnecessary one. What exactly is the advantage of a QROPS over a UK pension for a US resident? We will cover that in a third article, but we are hard pressed to find many.
Our first article detailing IRS correspondence about QROPS showed how it would be foolish for anyone to assume that the IRS are ignorant of people having funds transferred into QROPS, and it is clear they are starting to be pro-active for the first time about monitoring them.
QROPS- US Citizens/tax residents
As a result of an enquiry made to the IRS, they have indicated that under ordinary circumstances transfers between states (UK and Malta in this case) would not come under Article 18(1) of the 2001 United Kingdom-United States Double Tax Treaty, and the distribution may be viewed as taxable, this is because it is unlikely to be deemed a tax-deferred rollover distribution.
The IRS said, as an explanation, that plans outside of the U.S. are not recognized as qualified plans. Therefore, they cannot be transferred from state to state as a tax-free transfer, as is possible (something the US IRS term as a rollover) from a qualified plan to another qualified plan such as an US IRA or 401k.
Additionally, as well as potential tax charges and penalties, the IRS view QROPS as trusts and would require annual foreign trust reporting.
UK Pensions – US Citizens/tax residents
Those that hold UK schemes can refer to the IRS release in May 2010 which states:
“If an employer pension scheme in the United Kingdom and an SIPP are both pension schemes within the meaning of Article 3(1)(o), then a transfer of income earned by the employer pension scheme to the SIPP would not be a taxable event in the United States.”
Far more reassuring that the view about a transfer to QROPS!
We are of the opinion that the risk of taking a QROPS is unnecessary, given the insufficient advantages over leaving a pension within the UK pension system. We believe that a UK pension can be managed and invested in US funds and currency, as though it were in the US anyway, and will benefit US residents in the long run from a tax perspective without risk of the IRS ever seeking additional taxes other than income tax at retirement. The PCLS from a UK pension (currently 25% tax free) qualifies in the US for no further tax.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published in April 2015
- US residents – UK pensions and QROPS (Part 2)
- USA Tax On QROPS | Pension Legislation
- British Pension transfers for US Citizens
- USA residents with QROPS? – There May Be Trouble Ahead
- Uncle Sam may be in contact with you for the Facts about QROPS (FATCA)
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