Tags: sipps | isas | tax

How UK SIPPs, ISAs, Are Reported for US Tax Purposes

How UK SIPPs, ISAs, Are Reported for US Tax Purposes
(Picstudio/Dreamstime)

By
Friday, 31 January 2020 12:00 PM Current | Bio | Archive

Note: This is the first installment of a three-part series on United States Income Taxation of Self-Invested Pension Plans (“SIPPs”) and Individual Savings Accounts (“ISAs”) available under United Kingdom law.

Many United Kingdom citizens reside in the United States, and vice-versa.  Many such individuals have Self-Invested Pension Plans (“SIPPs”) or Individual Savings Accounts (“ISAs”) available under U.K. law.

SIPPs and ISAs Under U.K. Tax Law

A SIPP is a highly-advantageous personal retirement plan.  An employer establishes a SIPP for the benefit of an employee, and makes contributions to it.  The employee-beneficiary of the SIPP excludes from U.K. taxable income the employer’s contributions to the SIPP up to the employee’s earned income for the tax year (6 April to 5 April).  But if total contributions to SIPPs exceed £40,000 for a tax year, the employee-beneficiary is subject to a U.K. tax charge of up to 45 percent of the excess. 

SIPP income, whether interest, dividends, or net capital gain, is not currently subject to U.K. income tax.  After the SIPP beneficiary reaches age 55, 25 percent of each withdrawal from the SIPP is free of U.K. income tax.  The beneficiary is subject to U.K. income tax balance of withdrawals from the SIPP. 

An ISA resembles a U.S. Roth IRA.  A U.K. taxpayer may contribute up to £20,000 to ISAs in 2019-2020.   ISA contributions are not deductible in determining U.K. taxable income.   An ISA holder is not subject to U.K. income tax on interest, dividends, or net capital gains realized in the ISA.  Distributions from an ISA are free of U.K. income tax.

U.S. Tax Reporting With Respect to SIPPs and ISAs

A United States citizen or resident (“U.S. person”) is subject to U.S. income tax on his or her worldwide income, and to worldwide information reporting to the U.S. Internal Revenue Service.  A U.S. person who is deemed the owner of a foreign trust under the grantor trust rules of Internal Revenue Code §§ 671-679 must report the trust on Form 3520, Annual Return to Report Transactions With Foreign Trusts and the Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner.  Form 3520 is due to be filed by April 15th following close of the U.S. deemed owner’s calendar tax year, and is extended by timely filing of Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.  Form 3520-A is due by the 15th day of the third month following close of the U.S. deemed owner’s calendar tax year, and it is extended by timely filing of Form 7004, Application for Automatic Extension of Time To File Certain  Business Income Tax, Information, and Other Returns.

An ISA is always a grantor trust with respect to its U.S. deemed owner.  Therefore a U.S. deemed owner of an ISA must always report the ISA on Forms 3520 and 3520-A.  A SIPP is not a grantor trust until the U.S. deemed owner reaches age 55, and may begin receiving distributions from the SIPP.  See IRC § 678.  Therefore a U.S. deemed owner of a SIPP need not begin reporting the SIPP on Forms 3520 or 3520 until he or she reaches age 55.  This distinction is important in seeking relief from Internal Revenue Service penalties for failure to timely file Forms 3520 or 3520-A.  The deemed owner should not be assessed such penalties for tax years ended before his or her 55th birthday.

The penalty for failure to file Form 3520 is the greater of $10,000 or five percent of the value of assets reportable on Form 3520.  A like penalty obtains for failure to file Form 3520-A.  The penalties may be abated for reasonable cause.  Internal Revenue Service voluntary disclosure programs provide penalty relief.

Next up: U.S. income taxation of contributions to ISAs and SIPPs.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.

© 2020 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
StephenJDunn
Many United Kingdom citizens reside in the United States, and vice-versa.  Many such individuals have Self-Invested Pension Plans (“SIPPs”) or Individual Savings Accounts (“ISAs”) available under U.K. law.
sipps, isas, tax
680
2020-00-31
Friday, 31 January 2020 12:00 PM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved