Back in 2018, I wrote a blog about this subject, which received widespread interest. My research suggested that United Nations (UN) pensioners should be entitled to a partial exemption from UK taxation on some of their pension.
At the time, I was not entirely confident that HM Revenue & Customs (HMRC) would accept this position. Indeed, there was some debate as to the appropriateness of this in those early days. My initial article was published in November 2018, and I feel an update is useful.
The position now
HMRC does accept the principle that claims can be made by UN pensioners and now has an internal process to deal with such cases. However, occasionally it is still important to make sure that the inspectors dealing with these submitted claims are aware of this process in the first place. This is an issue the pandemic exacerbated, and it does often mean there can be a lengthy delay between a claim being submitted and the payment of a tax refund.
This partial exemption applies to every UN pensioner resident in the UK and usually applies for a significant number of years. However, it must be noted that this partial exemption does not carry on indefinitely.
Setting a precedent
A Westcotts client played a key role in the issue of taxation of UN pensioners in the UK. The client, a World Bank pensioner, set a precedent in the Upper Tribunal case of Macklin v HM Revenue & Customs .
The tribunal decided that the World Bank pension scheme should be considered, established in the USA for the purposes of reading the Double Taxation Agreement (DTA) between the UK and the USA.
Following correspondence with HMRC, Westcotts confirmed that the UN Joint Staff Pension Fund should also be considered established in the USA for the purpose of reading the UK/USA DTA.
Following American rules
A clause within the UK/USA DTA states: the amount of any pension from a scheme established in the USA that would be exempt from taxation in the USA, if the beneficial owner of the pension was a resident thereof, shall be exempt from tax in the UK.
What this means is that a UK resident can effectively ‘stand in the shoes’ of a hypothetical US resident to determine the tax treatment of their pension.
American rules allow for part of a pension to be considered a return of the original contributions made. The USA does not seek to tax this element.
It follows that at some point all the original contributions made will have been returned through pension payments. The pension will then revert to being fully taxable. Up until this point, part of the pension paid will be exempt from tax in the UK.
A complex but worthwhile process
The calculation to determine this partial exemption is complex and an understanding of US rules is required.
Of course, as time continues, there are fewer pensioners who need to consider reclaiming tax from earlier periods. However, any pensioners who have not looked at this issue should investigate whether there is any merit to making a claim. It is currently possible to go back six tax years.
How Westcotts can help tax advisors and pensioners
Westcotts is happy to work with existing advisors who might not necessarily have expertise in this complex area.
It is important that UN employees nearing retirement understand the partial exemption, how much it will be and for how long it will run.
We can help with these questions and provide support with any UK tax filings or offer tax advice.
After-tax pension earnings
For some soon-to-be retirees, it is worth understanding how much after-tax pension earnings they will have to fund their lifestyle requirements.
It is also important to consider how much of their lump sum to commute from the fund at retirement. Westcotts offers a service which can model a variety of scenarios to help people make these major life decisions.
For more information, whether you are a fellow advisor or new client, please contact me or call the Exeter office.