Americans Living in the UK - Part 3: Retirements, Pensions & Estate Planning
After having discussed investments in part 2 of our series on Americans Living in the UK we are now delving on retirement and estate planning. For Americans living in the UK, retirement and estate planning are rarely straightforward. You are dealing not only with UK domestic tax law, but also with the UK/US income tax treaty, the UK/US estate and gift tax treaty, and a separate social security agreement. This article is written from a UK perspective and gives general guidance only. Detailed US income tax and estate planning advice should be taken separately.
US Retirement Accounts & UK Tax Treatment
A point that is often missed is that the UK/US treaty does more than allocate taxing rights on pension payments. Article 18 says that where a UK resident is a member, beneficiary or participant in a pension scheme established in the US, income earned by that pension scheme may be taxed as that individual’s income only when, and to the extent that, it is paid out to, or for the benefit of, that individual. In other words, for treaty recognised schemes, the starting point is generally taxation on payment rather than annual UK taxation of internal growth. The treaty’s exchange of notes confirms that the relevant US schemes include qualified plans under section 401(a), IRAs, individual retirement annuities, section 408(p) accounts, Roth IRAs under section 408A, and section 403(a) and 403(b) plans.
That matters because many Americans in the UK assume that HMRC automatically taxes growth inside a US retirement account each year. For treaty recognised pension schemes, that is too simplistic. The treaty protection is not a general blessing for every US investment wrapper, but for recognised pension schemes it is a significant provision and is one of the main reasons why it is important to distinguish properly between a pension, an investment account and an ISA.
When money is actually withdrawn, the analysis shifts to Article 17. Article 17(1)(a) says that pensions and similar remuneration beneficially owned by a resident of one state are taxable only in that state. Article 17(1)(b) then adds an important exemption: if part of a pension payment from a scheme established in the other state would have been exempt there had the recipient been resident there, that amount must also be exempt in the state of residence. HMRC’s treaty manual expressly says the UK must exempt such amounts. This is why properly qualified Roth IRA distributions are widely treated as capable of being exempt in the UK as well as in the US, whereas ordinary distributions from traditional IRAs and 401(k)-type plans are usually taxable when drawn.
That said, it is better not to overstate the Roth point. The treaty protection depends on the payment coming from a treaty recognised pension scheme and the amount being one that would have been exempt in the US if the individual were US resident. So the practical position depends on whether the distribution is in fact a qualified Roth distribution for US purposes. Broad summaries that say “Roth IRAs are always tax free in the UK” go too far.
Lump sums also require more care than broad summaries often give them. Article 17(2) says that a lump sum payment derived from a pension scheme established in one state and beneficially owned by a resident of the other state is taxable only in the state where the scheme is established. On the face of the treaty text, that points to source state only taxation of the lump sum. But US citizens and long term residents must also reckon with the treaty’s saving clause structure in Article 1: only certain provisions are protected from the saving clause, and Article 17(2) is not one of the protected provisions listed for citizens. In practice, this means pension lump sums should not be reduced to a blanket rule without reviewing the taxpayer’s status and the interaction of treaty claims, domestic law and double tax relief.
The treaty also contains a contributions article, but this is a narrower relief than many people assume. Article 18(2) and (3) can allow deductions or exclusions in the host state for contributions to a pre-existing pension scheme in the home state, but only where contributions were being made before the individual began work in the other country and the competent authority accepts that the foreign scheme generally corresponds to a local pension scheme. HMRC’s manual makes the same point. In practice, this is much better viewed as a transitional or migrant worker relief than as a permanent planning tool for long term UK residents.
UK Pensions & Social Security
On the UK side, the domestic rules are more familiar. You can usually take up to 25% of the amount built up in a pension as a tax free lump sum, subject to the lump sum allowance, which is generally £268,275. The standard annual allowance is currently £60,000, though some people will have a lower allowance because of the tapered annual allowance or because they have flexibly accessed money purchase benefits.
For SIPPs and other defined contribution pensions, one practical point is that moving into drawdown and actually taking taxable flexible income are not always the same thing for tax purposes. HMRC’s pensions manual says the money purchase annual allowance is triggered by the first payment of income withdrawal from flexi access drawdown in the relevant cases. That distinction often matters for people who are still contributing, even if it is less important for those who are already well into retirement.
HMRC’s broader guidance is that pension income may be taxable if total income exceeds the personal allowance. So UK private pensions, workplace pensions and SIPP withdrawals remain part of the ordinary UK income tax calculation. The difficult part for Americans is usually not the UK pension rules themselves, but how they interact with US filing and treaty treatment.
US Social Security is different. Article 17(3) gives exclusive taxing rights to the country of residence for social security or similar benefits. HMRC’s treaty manual confirms that payments made by one state under its social security legislation to a resident of the other state are taxable only in the other state. So a UK resident receiving US Social Security is, in treaty terms, taxed on that income in the UK rather than in the US. National Insurance and US Social Security contributions, meanwhile, sit under the separate US/UK social security agreement rather than the income tax treaty.
Government service pensions should also be identified separately from ordinary private pensions. HMRC’s treaty manual notes that certain US government pensions, including some military pensions, fall under Article 19 rather than Article 17. The broad rule is that government service pensions are taxable only in the paying state unless the recipient is both resident in, and a national of, the other state, in which case taxing rights can switch. That distinction is important for dual UK/US nationals who have federal or state service pension rights.
Estate Tax / Inheritance
On the US side, federal estate tax is often less immediately relevant than people expect. The IRS currently states that the basic exclusion amount is $13,990,000 for 2025 and $15,000,000 for 2026. So many families with UK and US links may find that their more immediate exposure is to UK inheritance tax rather than US federal estate tax, though that will depend on the size and structure of the estate and whether portability or other planning is in point.
UK inheritance tax is far more likely to affect moderate estates. There is normally no inheritance tax if the estate is below £325,000, and that the standard rate above the threshold is 40%. If a qualifying residence passes to direct descendants, the effective threshold can rise to £500,000 for an individual because of the residence nil rate band. But readers should not assume that the residence nil rate band is always available in full. The current residence nil rate band is £175,000, and HMRC says it is tapered by £1 for every £2 that the estate exceeds £2 million; for a single estate using only one current £175,000 residence nil rate band, that means the allowance is fully lost once the estate reaches £2.35 million.
The biggest UK development is the new inheritance tax scope test from 6 April 2025. Non UK assets may now be subject to inheritance tax if the individual is a long term UK resident. A person is long term UK resident in a tax year if they have been UK tax resident for either the previous 10 consecutive tax years or a total of 10 tax years or more within the previous 20 tax years. The practical message is that consecutive residence is not required in every case: people can still fall within the regime under the broader 10 out of 20 test. HMRC also says that long term residence can continue for up to 10 tax years after leaving the UK, depending on the person’s residence history.
For Americans in the UK, that change is significant because the question is no longer just whether someone is “domiciled” here in the older shorthand sense. If you have been in the UK long enough to become long term UK resident, overseas assets can enter the UK inheritance tax analysis. Depending on the facts, that can include US investment portfolios and retirement assets. That is one reason why the inheritance tax side of cross border retirement planning has become more important, not less, even for people who are comfortable with the income tax treatment of their pensions.
Spousal planning still matters, but the cross border rules need to be described carefully. HMRC’s manual now makes clear that a special restriction applies where one spouse or civil partner is a long term UK resident and the other is not. That is therefore mainly a mixed status couple issue. It does not mean that every UK/US couple loses the spouse exemption after 6 April 2025. If both spouses are long term UK residents, the different concern is that the survivor may remain fully within the UK inheritance tax net on worldwide assets.
There is also a further pension related inheritance tax change on the horizon. HMRC’s published policy papers say that, from 6 April 2027, the government will bring most unused pension funds and death benefits into the scope of inheritance tax, while excluding death in service benefits payable from a registered pension scheme. But this is best described as announced policy with published draft material, rather than as a settled long standing rule that has been in place for years. For retirement and estate planning, it is a major development to watch.
There is also a separate UK/US estate and gift tax treaty. If both the UK and another country charge inheritance tax, tax may be avoided or reclaimed through a double taxation convention, and the United States is one of the listed convention countries. HMRC’s manual also notes that the convention can operate by giving one country the worldwide taxing right while limiting the other to certain local assets, with credit or waiver machinery to avoid double taxation. That treaty is extremely important in larger or more complex estates, but it is not a substitute for understanding the underlying domestic rules first.
Wills, Succession & Cross-Border Issues
Cross border estate planning is not only about tax. A will must be formally witnessed and signed to be legally valid, and that if you die without a will the law decides who inherits. For anyone with assets in both the UK and the US, wills, trusts and beneficiary designations should be reviewed together rather than in isolation.
Probate can also become more cumbersome once more than one jurisdiction is involved. Before applying for probate you need to estimate the estate’s value for inheritance tax, and the probate application forms require copies of any foreign wills or wills dealing with assets outside England and Wales, with translations where necessary. That does not mean everyone needs separate wills in both countries, but it does mean that cross border families should assume executors will need a more organised paper trail and, often, professional help.
One commonly missed issue: ISAs
One practical point worth adding for Americans in the UK is that an ISA is not a pension. ISAs are tax free in the UK, but the UK/US treaty’s pension protections are aimed at recognised pension schemes, not at ISAs. The IRS also states that US citizens and resident aliens abroad remain taxable on worldwide income. So although an ISA is highly attractive for UK only taxpayers, Americans should not assume that “tax free in the UK” means “tax free in the US”. The precise US treatment can vary depending on the investments held, but the broad warning is an important one.
Final thoughts
The key lessons are these. First, recognised US retirement schemes such as IRAs and Roth IRAs are not generally analysed in the UK in the same way as ordinary offshore investment accounts; the treaty matters. Second, pension lump sums and government pensions should not be reduced to simplistic rules without checking the treaty structure and the individual’s citizenship and residence position. Third, for inheritance tax, the post 6 April 2025 long term UK residence regime is now central, and the announced 6 April 2027 pension inheritance tax reform may further reshape estate planning. For Americans in the UK, retirement and estate planning still require joined up advice across both countries, but the UK side has changed enough that old rules of thumb should now be treated with caution.
