# UK citizen inheriting annuity from American relative - US federal tax implications



## Danny200 (6 mo ago)

We live in the UK and my wife is a British citizen. A US-based relative of hers has just passed away, and has left my wife an annuity. Am I right in thinking that the insurance company will automatically withhold 30% of the annuity, in order to cover US federal tax? 

Also, the form from the insurance company lists various options apart from a straightforward lump sum payment, such as taking over ownership of the annuity, deferring payment, establishing one’s own contract, etc. Are any of these options likely to offer ways of reducing or eliminating the federal tax charge?

Any help or advice offered on this would be gratefully received!


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## Bevdeforges (Nov 16, 2007)

US Federal income tax on a non-citizen (non-US-person, i.e. taxpayer) is a flat 30%. However the type of annuity involved may have some bearing on the taxation. Technically speaking, "insurance" proceeds are usually exempt from taxation - but it depends on what type of insurance. Chances are, the company paying out the annuity will first contact your wife to request either a W9 (for a US citizen or taxpayer) or a W8 form (non US citizen). 

If your wife is a US citizen, then she should fill out and return the W9, which will exempt her from the 30% withholding - though then they will send her an annual 1099 form, which shows what part of the payments during the year are or are not taxable and she'll be expected to include that information on her US tax returns.


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## Danny200 (6 mo ago)

Bevdeforges said:


> US Federal income tax on a non-citizen (non-US-person, i.e. taxpayer) is a flat 30%. However the type of annuity involved may have some bearing on the taxation. Technically speaking, "insurance" proceeds are usually exempt from taxation - but it depends on what type of insurance. Chances are, the company paying out the annuity will first contact your wife to request either a W9 (for a US citizen or taxpayer) or a W8 form (non US citizen).
> 
> If your wife is a US citizen, then she should fill out and return the W9, which will exempt her from the 30% withholding - though then they will send her an annual 1099 form, which shows what part of the payments during the year are or are not taxable and she'll be expected to include that information on her US tax returns.


Many thanks, this is very helpful. The insurance company is asking my wife to complete a W8BEN form. I have read elsewhere about some insurance proceeds being tax exempt, so it sounds like a discussion with the insurance company would be useful, to try to find out more about what kind of policy or annuity it is.


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## JustLurking (Mar 25, 2015)

Danny200 said:


> We live in the UK and my wife is a British citizen. A US-based relative of hers has just passed away, and has left my wife an annuity. Am I right in thinking that the insurance company will automatically withhold 30% of the annuity, in order to cover US federal tax?


Assuming your wife *does* *not* hold US citizenship or a green card (in addition to her being a UK citizen and resident), the US/UK tax treaty reserves taxing rights on annuities to country of residence only, so the UK in this case. Article 17 paragraphs 1(a) and 4:


> 1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
> ...
> 4. Any annuity derived and beneficially owned by an individual (“the annuitant”) who is a resident of a Contracting State shall be taxable only in that State. The term "annuity" as used in this paragraph means a stated sum paid periodically at stated times during the life of the annuitant, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than in return for services rendered).


Additionally, the IRS's instructions to payers shows 0% withholding on pension and annuity payments made to US nonresident aliens resident in the UK. Supplying the payer with a W-8BEN or equivalent should set withholding correctly. Otherwise, file a 1040-NR with the IRS to reclaim US tax withheld.


Danny200 said:


> Also, the form from the insurance company lists various options apart from a straightforward lump sum payment, such as taking over ownership of the annuity, deferring payment, establishing one’s own contract, etc. Are any of these options likely to offer ways of reducing or eliminating the federal tax charge?


Beware. Taking a lump sum could change the calculus. Treaty article 17 paragraph 2 reverses the above for "lump sums", so that tax here would be reserved to the US:


> 2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.


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## Danny200 (6 mo ago)

JustLurking said:


> Assuming your wife *does* *not* hold US citizenship or a green card (in addition to her being a UK citizen and resident), the US/UK tax treaty reserves taxing rights on annuities to country of residence only, so the UK in this case. Article 17 paragraphs 1(a) and 4:
> 
> Additionally, the IRS's instructions to payers shows 0% withholding on pension and annuity payments made to US nonresident aliens resident in the UK. Supplying the payer with a W-8BEN or equivalent should set withholding correctly. Otherwise, file a 1040-NR with the IRS to reclaim US tax withheld.
> 
> Beware. Taking a lump sum could change the calculus. Treaty article 17 paragraph 2 reverses the above for "lump sums", so that tax here would be reserved to the US:


Many thanks for this helpful advice. My wife indeed does not have US citizenship or a green card, and it's good to learn that if the insurance company gets things wrong that any incorrectly witheld tax can be reclaimed.


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