# Tax implications



## salix (Apr 27, 2014)

I have lived in the UK now for about 5 1/2 years. My husband is currently employed full-time and pays his normal taxes in the UK.

I have not worked in the UK as I retired in the USA ten years ago. My income is retirement through PERS and STRS as I was a public employee. My taxes are withheld directly from my checks and I file each year with the IRS.

That was my background, now my potential situation.

I am currently awaiting the decision on my ILR (M) and have no reason to believe it won't be granted shortly. I am then eligible to apply for citizenship in the UK if I so choose.

Would there be any tax implications for me in the UK if I were to gain citizenship and all of my income is from the US and taxed there? I wouldn't want to suddenly find out my retirement income would be taxed in both countries.

If you have answers or even just can point in the right direction of where I should research things before I decide to apply for naturalization.

Thanks.


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## 255 (Sep 8, 2018)

salix -- First, your UK tax responsibilities became effective once you became resident in the UK; taking UK citizenship will not change your obligation to pay taxes in either the US or the UK. The UK & the US have a tax treaty, that generally prevents double taxation: https://www.gov.uk/government/publications/usa-tax-treaties & https://www.irs.gov/businesses/international-businesses/united-kingdom-uk-tax-treaty-documents . I'm sorry, I am not knowledgeable about specifics -- but bottom line, if you are currently filing correctly, nothing will change if you take UK citizenship. If after research, you determine that you are not filing correctly, you can make adjustments, even filing amended returns, if you see fit. Many countries require reporting of non-taxable income, even if no tax is required. Cheers, 255


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## Moulard (Feb 3, 2017)

As 255 suggests, do read the US-UK tax treaty, as all treaties are different. Treaties typically cover three types of pensions (Private, Public and Government employee pensions). Each are handled differently - in terms of who has primary taxing rights, limitation of benefits and the savings clause.

That said, the US has a model treaty which is the starting point for treaty negotiations (it gets updated about every 10 years) - so from a broad brush, I can comment without reference to the specific treaty.

The Government Service (sometimes Government Remuneration) article should have a paragraph that deals with the taxation of pensions paid by, or out of funds created by, one of the States, or a political subdivision or a local authority thereof, to an individual in respect of services rendered to that State or subdivision or authority.

When the payment is made to a citizen and resident of the other Contracting State so you will want to check carefully as that may subject you to UK taxation on it once you become a UK citizen. There is often a clause in the Government Service article that will allow the UK to tax you on this income.

That said, typically one country will have the primary taxing right and the other gives you a tax credit as a means of limiting double taxation (typically defined in the relief from double taxation clause). Where income is taxable in both countries, the limitation of benefits article typically means you end up paying the higher of the two tax rates.

So .. yes, you will want to read the treaty.. paying attention to 4 relevant articles..:

whatever article the savings clause is located in... sometimes it is the scope article.
Government Service / Government Remuneration
Limitation of Benefits
Relief from Double Taxation


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## salix (Apr 27, 2014)

Thank you both so much.

I was a local government employee in California. I did hold a management position and worked 30+ years, because of that I receive a generous retirement. I pay an obscene amount of tax, although I can't really complain since it's because of my income.

I also receive a smaller retirement from CA State Teachers retirement, as I was the beneficiary recipient for my ex-husband who has since passed away.

I can't imagine that the UK would want even more than I am currently paying to the IRS. I was just afraid to take the step of becoming a citizen and finding out I will be hit even harder by the "tax man".

I will review the documents referenced and come back if I still have more questions.

Thanks again.


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## Moulard (Feb 3, 2017)

So I had a bit of spare time, and I took a look at the US-UK Tax treaty...

TL-DR:
Once you receive ILR your US pensions will be UK taxable as a permanent resident of the UK. The US will give you a tax credit according to US domestic tax rules. In essence this means that you will get a non-refundable credit up to the amount of US tax owed. If UK taxes are higher than US taxes then you will owe nothing in the US and can carryover excess credits for up to 10 years. If US taxes are higher than the UK then you would have to pay the US the difference between US and UK taxes or consume any credits that you were able to carry over… There is no material difference tax wise between taxation as a permanent resident and citizen.

I’ll now try to weave you through the treaty clauses that have led me to that conclusion. That way you can follow along in the treaty to make sure you agree with my conclusions..



> ARTICLE 19 Government Service
> 2. Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention:
> 
> a) any pension paid by, or out of funds created by, a Contracting State or apolitical subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall, subject to the provisions of sub-paragraph b) of this paragraph, be taxable only in that State;
> ...


As you are not both a resident and national of the UK, you are covered by paragraph 2(a) - and it is only US taxable.

But… you cannot read clauses in isolation…..

ARTICLE 1 paragraph 4 has the savings clause which allows that a 



> Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect


There is a carve out on that in paragraph 5(b)



> 5 b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.”


The technical explanation of the clause makes it clear that the benefits referred to in subparagraph (b) of paragraph 5 are all intended to be granted to temporary residents of a Contracting State but not to citizens or to persons who have acquired permanent residence in that State. 

So once you become a Permanent Resident (which I read as once you are granted ILR) of the UK you will cease to be protected by Article 1 Paragraph 5(b) and thus your US pension becomes taxable by virtue of the fact that the treaty allows the UK to tax its citizens and residents as if the treaty was not in effect.

So once you are granted ILR you will be taxed in the US by virtue of your US citizenship, and the UK by virtue of the fact you are a permanent resident.

You now need to turn to Article 24 (Relief from Double Taxation) to figure out how to deal with the double taxation that results.



> 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income
> a) the income tax paid or accrued to the United Kingdom by or on behalf of such citizen or resident;


You are covered by this section as once you are granted ILR you will be a US Citizen who is resident in the UK who pays UK income tax. The outcome is that the US will allow you a tax credit for UK taxes paid or accrued according to US law.

Hope that explanation and walk through of the treaty makes sense.


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## salix (Apr 27, 2014)

Thank you Moulard, this will require some study.

The main thing I glean right off is that dual citizenship is irrelevant.


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