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  1. However : Do grantor trust rules (Sec 671-679) come into play for a SIPP? Even if a SIPP is considered a pension under the US-UK treaty (and presumably many pensions are trusts), do the grantor trust rules override this consideration and require 3520 and 3520-a reporting? For SIPP, rule 673 on reversionary interest of > 5 % would seem hard to overcome for individuals making contributions.
    As an aside, does trust reporting fall under the tax code meaning the tax treaty takes precedence in defining whether a SIPP is a pension or a foreign grantor trust?
    Thanks in advance for any insight!

  2. Sorry for the brief earlier response. Yes. There is more-or-less consensus (but not definite law) on the idea that you describe. As soon as the employee’s contributions exceed 50% then bad stuff happens. This was the topic of last month’s International Tax Lunch free phone-in conference call (hint, hint, shameless plug) that we gave. Basically it’s a mess.

  3. Thanks for answering that; though I did find on the website of ‘How US Citizens can make the most of UK Pensions changes’ under ‘when is a pension not a pension’ that if you contribute more than 50% to your pension (vs your employer) that it is then treated as a trust by the IRS, so you need to fill out required docs but also that there is wording which means that the gains are not taxed…sorry I can’t give you the direct link; can’t work it out on this ipad.

  4. Hi there
    Just wondered about SIPPs, are they treated as a Foreign Grantor Trust by the IRS, as they are essentially a trust or treated as a foreign pension?

  5. Hi Phil,

    Would a step up in basis be available to an ISA or a nonqualified foreign pension of an NRA if inherited by a US heir ?

  6. @Joan,

    You are absolutely right. There is a teensy bit of hypocrisy here. US “retirement” accounts have holes in them too.

    I would guess the reason why (for instance) an IRA qualifies to be a tax-deferral device and an ISA does not is simple.

    The tax deferral status of an IRA is hardwired into the Internal Revenue Code. Not so for an ISA, so the IRS has to look at the US tax laws, look at an ISA, then say “it looks more like an elephant than a tangerine, so it is an elephant.”

    It is important to remember that the tax laws are fiction. They are made up. Don’t expect too much consistency in the plot when you read the story. 🙂

  7. A question I have regarding the ISA: it’s been mentioned that the ISA isn’t a pension scheme since it can be withdrawn for reasons other than retirement. An IRA can also be withdrawn for other reasons: education, health insurance, health costs above 7.5%, etc. 401(k)s can have loans or be withdrawn if the owner is over 55 & ‘separated from service’. Are these also not reasons other than retirement that would disqualify these accounts under that reasoning?

  8. @Don,

    Gilbert Harding, the British humorist, answered the question about overthrowing the US government by writing “sole purpose of visit”. It didn’t go well.

  9. Phil

    I have been reading the US UK IGA more closely and the UK has carved out a whole slew of products from FATCA. Knowing the UK well in my opinion if the banks are not compelled to supply the HMRC with the data they won’t leaving the IRS without the data.

    Yes the IRS will still want to apply their tax rules but essentially for the exempt products the status quo seems to be preserved.

    In addition the UK banks are only required to have the customer ‘self certify’ if they are a US person or not. Who in their right mind is going to say yes?

    It reminds me of the situation for immigrants arriving at Ellis Island and asked on a form if they plan to overthrow the US government or if they’ve been a member of the communist party? Who is going to say yes?

  10. @Alex,

    Totally agree. Whether something is a pension (or not) for FATCA definitional purposes will not have an impact on any other element of tax law. Even if something is _not_ a “specified financial asset” for FATCA purposes, it will probably trigger a reporting or tax requirement somewhere else in the Internal Revenue Code.


  11. By the way, the discussion of whether or not a pension scheme is FATCA reportable by the scheme administrator is very interesting. But, personally, I think that this should play absolutely no role in whether or not the scheme beneficiary should declare the scheme on FBARs or 8938s. I think that you’d have to be out of your mind not to report any and all schemes if you’re required to, or if you even THINK that you might be required to. My comment about taxpayer intent in my previous posting is completely invalid if the pension isn’t reported to the IRS in some form or fashion. Just my opinion. IANAL.

  12. I think that the key phrases are “approved employment-related retirement schemes” and “personal pension schemes approved”. The references to the Income and Corporation Taxes Act of 1988 describe the conditions for HMRC approval of employment and personal pension schemes.

    A UK scheme is either approved or not. It’s fair to say, I think, that any pension/retirement scheme marketed by a UK pension provider as an approved UK scheme is, um, approved. I guess that there may be unapproved schemes, but it’s hard to imagine that a large, well-regulated pension provider like Prudential or Fidelity would market such a thing without being clear about its status.

    If the scheme is approved (and the Act is the vehicle to determine approval), it’s covered by the treaty. I can’t see why this wouldn’t be the case.

    ISAs that allow arbitrary withdrawals do NOT meet the criteria for an approved UK personal pension scheme. See for the restrictions. SIPPs seem to meet those restrictions. I don’t know this for a fact, but I believe that, to be allowed to market something as a SIPP, a UK financial services company must follow a prescribed set of SIPP rules, which make the SIPP a UK approved scheme. This protects the SIPP “brand”.

    If the IRS were to challenge the exclusion of income during the growth phase of a UK pension scheme, my first step would be to contact the provider and get a letter from them affirming that it’s an approved UK scheme. Failing that, or in addition to that, I’d list the restrictions on the scheme and reference the appropriate part of the act, such as the excerpt above.

    This leaves the question of whether or not a particular pension scheme is a trust or not, and whether 3520/3520-A filing is required or not. As y’all know, opinions are sharply divided on this, and the internet is not a reliable place to resolve that. The article above these comments is very well reasoned.

    There’s also a question of taxpayer intent: if it’s an approved UK pension scheme, it’s protected by the treaty. If it’s disclosed on FBARs and 8938s as appropriate, do we know of any case where the IRS has (a) asserted that it’s a trust, (b) asserted that 3520/A filings are required and (c) penalized an otherwise compliant taxpayer?

    The intent of the US/UK treat is clear: to make this simple. It says so up front.

  13. Phil

    Check out this link –

    Apparently the explanation I heard wasn’t correct or I misunderstood.

    I’ve always had normal company pensions so SIPPs never applied to me, but other people did talk about them.

    It stands for Self Investment Personal Pension and it’s not part of the state pension but approved by the HMRC.

    It probably won’t be reportable under the US UK IGA for FATCA.

  14. @Don, thanks for the explanation. The first problem I always have is “What, exactly, is this thing?”

  15. SIPPs are like this. If you have a personal company pension then you get a reduced NI payment (and the company as well). If no company plan exists you pay a higher percentage (or SIPPs). SIPPs are part of the normal UK state pension.

    At least that’s how it was explained to me in the UK.

  16. Speaking of pension protection under the US/UK tax treaty, are SIPPs considered pensions under the treaty criteria? I have found competing theories on the SIPPs, – some argue that it is a pension under the treaty, whereas others argue that it is a foreign grantor trust.

    Even if a pension, it is similar to the RRSPs that the IRS considers to be trusts, so presumably 3520 and 3520-A reporting would apply in either circumstance.

    The big difference then becomes whether or not income is taxable as a foreign grantor trust, subject to PFIC reporting as well, or whether the income is protected from current taxation as a pension under the treaty.

    It seems to me that the SIPP appears to qualify as a pension under the terms of the notes to the treaty as it is an officially recognized UK pension plan, but it is not clear since specific types of plans are not named.

    The qualifying criteria for UK plans is:

    In the UK: (1) Approved employment-related retirement benefit schemes (for purposes of Chapter 1 of Part XIV of the Income and Corporation Taxes Act of 1988) and (2) Personal pension schemes approved under Chapter IV of Part XIV of such Act).

    When you go to the law, I do not see specific names such as SIPP, but the general criteria for personal pension schemes would certainly seem to encompass SIPPs. However, an unofficial source, Wikipedia, includes a SIPP as one of several official UK pensions:

    From Wikipedia’s summary – Pensions in the United Kingdom fall into three major divisions and 7 sub-divisions; State Pensions (Basic State Pension and State Second Pension (S2P)), Occupational Pensions (Defined Benefit Pension and Defined Contribution Pension) and Individual/Personal Pensions (Stakeholder Pensions, Group Personal Pensions and Self-Invested Personal Pension). Personal accounts, automatic enrolment and the minimum employer contribution will be new policies joining these from 2012.

    Any thoughts? Seems to me it is reasonable to claim treaty treatment for the SIPP and not report the income, but I have seen so many advisors say they are treating this as a foreign grantor trust with full income reporting, it gives me pause. Perhaps some advisors are doing it simply out of an abundance of caution given the high penalties if treated incorrectly.

  17. Just one more thought – even the IRS agent doesn’t know what he talking about.

    Yes under US tax law the ISA is not a pension, but UK banks won’t be reporting under FATCA so it’s a moot point.

    By the way the £50,000 limit for annual pension contribution is the same exact limit any UK citizen can put aside each Gov’t fiscal year. (UK runs from 5 April to 6 April every year.)

  18. Phil

    Here is the wording from the US Treasury website (just google UK US IGA it comes up)

    III. Exempt Products. The following categories of accounts and products established in the United Kingdom and maintained by a United Kingdom Financial Institution shall not be treated as Financial Accounts, and therefore shall not be U.S. Reportable Accounts, under the Agreement:
    A. Certain Retirement Accounts or Products
     Pension schemes registered with HMRC under Part 4 of the Finance Act 2004 and pension arrangements where the annual contributions are limited to £50,000 and funds contributed cannot be accessed before the age of 55 except in circumstances of serious ill health.
     Those that are UK-registered pension arrangements (including authorised payments) as set out in the Finance Act 2004 that are excluded from the definition of Financial Account pursuant to Article 1(s)(3) of the Agreement.
    B. Certain Other Tax-Favoured Accounts or Products
     Individual Savings Accounts (ISAs) – as defined in the Individual Savings Account Regulations 1998 (SI 1998 No.1870) and subsequent Amendment Regulations  Junior ISAs – as defined in the Individual Savings Account Regulations 1998 No.1870, and subsequent Amendment Regulations  Child Trust Funds – as defined in the Child Trust Funds Act 2004 and subsequent Amendment Regulations  Premium Bonds – where issued by NS&I (UK National Savings and Investments)  Children’s Bonus Bonds – where issued by NS&I (UK National Savings


    I think the agreement makes it clear ISAs are exempt unless I’ve missed a trick.


  19. If ISAs are exempt from FATCA reporting, the US is basically in the same position as pre-FATCA, depending upon the US person to report.

    The tax treaty lays out the rules after the fact and becomes known to the IRS.

    ISAs act like pensions in the respect that limits are placed how much can be put in each UK fiscal year. The current limit is about 10K GBP per year in a determined ratio of cash and shares.

    It’s a small loophole possibly from FATCA.

  20. Yes, the fact that ISAs are not exclusively dedicated to retirement purposes is what takes them out of the realm of protection under the US/UK treaty.

  21. IRAs are defined as qualified pension plans in the US/UK tax treaty. They are specifically named along with 401k, 403b, 401a etc. The ISA does not receive the same recognition because it is not specifically for retirement and has fairly liberal withdrawal rules.

  22. “In other words, this requires looking at the underlying legislation in every country around the world to divine whether a particular device (RRSP, LIRA, RESP, etc. in Canada alone) would or would not be a trust. The Chief Counsel’s office can’t do that. They don’t have enough people to monitor and analyze tax law worldwide in real time.”

    Well. Yes. But.

    If you’re going to have a system of cross-border citizenship-based taxation (which people in a wiser era didn’t enforce), you will, necessarily, get dragged into making all these meaningless legalistic decisions. Yes, it’s a waste of everybody’s resources, but the blame belongs with Congress.

  23. Employer pensions are a different animal entirely. Usually the income tax treaty protects the taxpayer and forces the USA to treat the pension like, well, a pension.

    The ISA is part of a small family of odd little beasts where funding is (mostly) from the taxpayer. Think of IRAs or Section 529 plans in the USA. Think RRSPs, RESPs, etc. in Canada.

    The danger with these accounts is threefold: taxation of the income, characterization as a foreign trust, and the tax treatment of contributions.

    Pensions have treaty protection. Usually. These odd little beasties do not. Usually.

    The little beasties, however, are incredibly common and the IRS-promulgated uncertainty causes an immense amount of existential angst. OK I might have drifted into hyperbole there.

    Anyway, pensions deserve examination someday, too. 🙂 Thanks for the comment.

  24. The ISA can theoretically be used for purposes other than retirement savings. Therefore it can’t be a pension plan protected under the income tax treaty between the USA and UK.

    As a pension plan the solution would be simple — the ISA would be non taxable in the USA.

  25. one thing zou do not address is the fact that ISA’s are the UK main way of saving for your retirement these days. You have the basic State pension scheme, but if you want to add to that ISA’s are the way most people will do it. So how is the IRS going to view them in that respect ??

  26. @Clive,

    Sorry I misunderstood. Yes I agree. The IRS should ignore the stocks and shares ISA and look at what is held in it. As you say, individual equities don’t create a problem; pooled investments create Form 8621 problems.


  27. Phil,
    I’m not saying the ISA is a PFIC, I’m saying that the ISA is meaningless as far as the IRS is concerned. You ignore it for US tax purposes. If you own a stocks and shares ISA you would just look at the stocks and shares investments, If you owned individual equities, then not so bad for US taxes, if you own a pooled investment the PFIC.

  28. Clive,

    I agree that a cash ISA should just be treated as a bank account where the interest is not taxable. The UK government didn’t want to make all interest income tax-free but wanted to encourage saving, so the cash ISA was created to give people limited (in amount) savings that would generate tax-free income.

    For the stocks and shares ISA I would have to think about your conclusion (the ISA itself is a PFIC). First understand that the PFIC rules are evil and I hate them with the heat of 10,000 suns. So voluntarily accepting PFIC status for anything is a tough assignment for me to accept. 🙂 I am just revealing my bias.

    In favor of your characterization is elegance and simplicity. We create a characterization for US tax purposes that solves the problem. It also solves the problem of trying to parse the ISA’s contents for US tax purposes. ISAs hold unit trusts usually. By treating the ISA itself as a PFIC we have a single PFIC to wrestle with instead of a bucket of PFICs.

    I think that means we would have to treat the cash ISA as a PFIC too. That’s bad because the interest income would be taxed to death as an excess distribution under the PFIC rules. But since when did the IRS give two hoots about wrongheadedness and inequity of results?

    But we have to figure out a way around the statutory requirement that a PFIC must be a foreign corporation. The IRS is perfectly willing to bend this requirement – if something looks like an association taxable as a corporation. If you create a trust that functions for all purposes like a corporation, you get taxed like a corporation.

    I don’t see how the IRS can stretch that to an account relationship with a UK financial institution. There is no “association” of the human and the institution. The two are not rowing the boat together to get the chicken to the other side of the road. Or something.

    So that is why I default to the conclusion that these are just accounts at a random financial institution. The UK sprinkles happy tax-free sparkle-dust on the accounts and the US does not.

    Your comment demonstrates Michael Miller’s point in an earlier comment, though. We DO have to be intellectually rigorous and consider the possibility that an ISA is an entity type other than a trust. I am not saying my conclusion is right. I am just saying that I hate PFICs so I like my answer. 🙂

  29. Surely an ISA is just a tax wrapper that is invisible to the IRA. We just ignore it and look at the underlying investments. A cash ISA is an interest bearing account and a stocks and shares ISA is a PFIC. So if you are a US tax payer don’t own the stocks and shares ISA and if you own the cash ISA you just pay US tax on the interest and file FBAR and FATCA is you meet the thresholds.

  30. That’s a good point. I had not thought of that before. In my conversations with people — inside and outside of the government — the question has implicitly been “foreign grantor trust or just a regular old account with assets in it?” Or maybe (as with fideicomiso structures) “trust or principal/agent?”

    The analysis should also disprove the existence of some other entity relationship, as you note. This should not be ignored, as I have certainly done up to now.

  31. Ordinarily, if we’re looking at Treasury Regulations Section 301.7701-4(a) to determine if a given arrangement should be classified as a trust, the answer “no” means that the arrangement is therefore a business entity. If an ISA isn’t a trust, is it a business entity?

  32. I think you are right about supers. There are problems with the definition of foreign trusts. And let’s take it one step further. Assume that the super is a foreign grantor trust (in the eyes of the U.S. tax law). Then an employer contribution to the superannuation is taxable income to the individual, and all income earned is taxable too. Of course, most superannuations contain unit trusts/mutual funds, so that’s a PFIC problem right there. It really deserves its own blog post, because I want to collect other opinions on the problem.

    The true solution would be for the two governments to update the income tax treaty to solve the problem once and for all. That’s not likely to occur in any reasonable amount of time.

  33. Hi Phil,

    Thanks for the analysis, and in particular for the parting comment about Australian superannuations. I was mentally trying to apply your analytic method to the case of Australian superannuation account, but it doesn’t quite seem to work. My current thinking is that the only way out for Aussie super accounts (in terms of 3520 and 3520-A) is via the 402(b) exemption. But I’m not a professional.

  34. Richard, thanks for the comment and the counterpoint.

    You are right about the Notice and the IRS position on RRSPs — they did say that RRSPs are trusts. I am not sure why.

    If I were to distinguish RRSPs from ISAs I would do so on the grounds that RRSPs are an explicit retirement savings device with appropriate Canadian legislation around it. ISAs are a device that allows tax-free savings for any purpose without any of the restrictive baggage that surrounds retirement savings plans.

    In other words, this requires looking at the underlying legislation in every country around the world to divine whether a particular device (RRSP, LIRA, RESP, etc. in Canada alone) would or would not be a trust. The Chief Counsel’s office can’t do that. They don’t have enough people to monitor and analyze tax law worldwide in real time.

    My blog post assumes — in a hand-wavy fashion — that the functional and legislative rules for ISAs are such that they are basically regular bank accounts with a veneer of tax benefits on them. The ISA manager does not, for instance, have a duty to invest like the mythical prudent investor for the benefit of the beneficiaries.

    But this is an assumption. And your counter example is worth considering. And I may well be wrong in my analysis of ISAs. I’ve been wrong before.

    Especially since Australian superannuations are so problematic.

  35. But Phil,
    The IRS has claimed in the second paragraph of Notice 2003-75 that Canadian RRSPs are foreign trusts. The simpler Form 8891 was created to replace Forms 3520 and 3520-A because of the special provisions for tax deferral in the US-Canada treaty. This doesn’t change the fact that IRS thinks an RRSP is a trust. It follows that IRS would claim that Canadian tax-free savings accounts (TFSAs), UK ISAs and all other such arrangements are trusts, no?

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