U.S. Income Taxation of Contributions to SIPPs and ISAs
Note: This is the second of three articles on United States income taxation of Self-Invested Pension Plans (“SIPPs”) and Individual Savings Accounts (“ISAs”) under United Kingdom law.
The first article in this series examined SIPPs and ISAs under United Kingdom law, and how they are reported for United States tax purposes. This article considers U.S. income taxation of contributions to SIPPs and ISAs.
SIPPs and ISAs are not qualified retirement plans under Internal Revenue Code § 401(a). Therefore, under IRC §§ 402(b)(1) and 83(a), property transferred to a SIPP or an ISA in connection with the performance of services is includable in the gross income of the person performing such services in the first taxable year in which such person’s rights in the property are transferrable and not subject to substantial risk of forfeiture. But as the rights of such person in the property are not subject to the performance of substantial future services but only the passage of time, and the property is currently includable in such person’s gross income, unless the U.S.-U.K. Income Tax Treaty of 2001 (the “Treaty”) intervenes to prevent the current incidence of U.S. income tax.
The Treaty may well provide relief. Article 1, Paragraph 4 posits the usual savings clause—either Contracting Party (the United States or the United Kingdom) may tax its citizens or residents as if the Treaty had not taken effect. But Article 1, Paragraph 5(a) provides an important exception for pensions, annuities, and pension schemes. Article 17, Paragraph 1(a) of the Treaty provides that Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State. Article 17, Paragraph 1(b) provides that, notwithstanding sub-paragraph (a), the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State. Article 18, Paragraph 1 of the Treaty provides that where an individual who is a resident of a Contracting State is a member or beneficiary of, or a participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to Article 17, Paragraph 1 of the Treaty, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme.
To illustrate, assume that Nigel, age 59, a British citizen, is retired and living in the United States. He has two SIPPs, each holding stocks and bonds, generating interest dividend and interest income. Under Article 17, Paragraph 1(a) of the Treaty, the dividend and interest income realized by the SIPPs is taxable if at all only by the United States. Under Article 17, Paragraph 1(b) of the Treaty, the dividends and interest realized by the SIPPs are exempt from U.S. income tax to the extent they would be exempt from U.K. income tax. Under U.K. law, 25 percent of each and every distribution from the SIPP is exempt from income tax. Under Article 18, Paragraph 1 of the Treaty, income realized by the SIPP is not subject to income tax until it is distributed.
Nigel must disclose these treaty positions must be disclosed on a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), filed with his U.S. income tax return.
The Treaty does not provide relief from information reporting requirements. Nigel must report his SIPPs on Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. These are addressed in the first article in this series.
Stephen J. Dunn, CPA, J.D. LL.M, is a tax attorney and the founder of Dunn Counsel PLC, Troy, focusing primarily on assisting U.S. taxpayers comply with U.S. laws concerning foreign accounts, assets, and income.