United Nations (UN) pensioners may be entitled to partly exempt some of their pension from UK taxation.
The use of the word ‘may’ is deliberate, as whilst the part exemption has application to every UN pensioner resident in the UK, this part-exemption does not carry on indefinitely. Please read on for an explanation of why this is the case.
Previously, a Thomas Westcott client who is a World Bank pensioner set a precedent in the Upper Tribunal case of Maklin 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.
Thomas Westcott, following lengthy correspondence with HM Revenue & Customs, has 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.
A clause within this DTA states that 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. This allows a UK resident individual to ‘stand in the shoes’ of a hypothetically resident US individual 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 and the USA does not seek to tax this element. It therefore follows that at some point all the original contributions made will have been returned by way of pension payments and 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.
The calculation to determine this part-exemption is complex and an understanding of US rules is required. We suggest that professional advice is sought to determine the part of any UN pension exempt from tax and to seek to claim a tax refund for previous tax years.
Does a similar treatment apply to UK pensioners receiving pensions from other international organisations?
As briefly mentioned above, this treatment also applies to World Bank pensioners. There may be application to other international organisations if it is felt that their pension schemes are established in the USA. We are happy to consider this on a case by case basis.
Finally, a reminder about the 10% rule
Until 6 April 2017 all overseas pensions benefitted from a rule that meant only 90% of an overseas pension was taxed in the UK. This rule has now been removed.
For 2017/18 onwards only overseas pensions arising from service in the government of a UK dominion will continue to benefit from a 10% deduction.
By Paul Webb , Tax Manager
Please contact myself or your usual Thomas Westcott contact on 01392 288555 for a fuller discussion of the above and to gain an understanding of how we may assist with your tax affairs.