SIPP US Tax Reporting: Treaty Protection, FBAR and Form 8938

SIPP US tax reporting splits into three separate questions: whether the US taxes the growth inside the scheme, which US information forms the SIPP has to appear on, and how withdrawals are taxed when they start. The treaty usually answers the first favourably. It does almost nothing about the second, which is where the penalties live.

What does SIPP US tax reporting actually involve?

A self-invested personal pension is a UK pension wrapper that lets you choose the investments inside it. For an American in the UK — or a British person who has moved to the US and left a SIPP behind — it sits across two systems that treat it differently. The UK gives it tax relief going in and taxes most of it coming out. The US starts from the position that a foreign arrangement is not a US qualified plan, then looks to the treaty for relief and to its own reporting rules for disclosure.

Keeping those apart is the whole discipline. Relief from tax comes from the treaty. Reporting obligations come from domestic US law and are almost entirely unaffected by the treaty. A SIPP can be completely protected from current US tax and still appear on two or three US forms in the same year. Our SIPP and US/UK pensions service handles both sides together for that reason.

Does the treaty stop the US taxing growth inside a SIPP?

For most people, yes, and the provision is Article 18(1) of the 2001 convention. Where an individual resident in one country is a member or beneficiary of a pension scheme established in the other, "income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 …, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme)".

Two things make that usable. First, the deferral is not lost on an internal transfer: moving between schemes is expressly outside it. Second, Article 18(1) is one of the provisions Article 1(5) preserves from the saving clause, so a US citizen can rely on it — unlike most of the treaty, as we explain in our post on the saving clause in the US/UK tax treaty. Note that the current Article 1(5) is the version substituted by the 2002 protocol, which also brought Article 18(5) inside the exceptions.

Relying on a treaty article to override the Code is a treaty-based return position, so it belongs in the disclosure analysis set out in our guide to Form 8833 treaty position disclosure — bearing in mind that reporting is waived for many individual pension positions, and that the waiver's wording is about income derived from pensions rather than about growth inside a scheme.

Is a SIPP reportable on the FBAR?

Normally yes. The IRS states that "an account at a financial institution located outside the United States is a foreign financial account", and that a US person must file "if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported". The FinCEN filing instructions define a financial account to include "a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution".

The instructions do carve out retirement arrangements, but only American ones. An owner or beneficiary of an IRA "is not required to report a foreign financial account held in the IRA", and a participant in or beneficiary of "a retirement plan described in Internal Revenue Code section 401(a), 403(a), or 403(b) is not required to report a foreign financial account held by or on behalf of the retirement plan". A UK SIPP is not any of those, so no exception reaches it. The FBAR is due on 15 April with an automatic extension to 15 October, and is filed electronically through FinCEN's BSA E-Filing System.

Does a SIPP go on Form 8938 as well?

Yes, above the threshold, and yes in addition to the FBAR rather than instead of it. The IRS is direct about foreign pensions: "If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you."

The thresholds turn on filing status and where you live, and the doubling-up of the two forms is the subject of our post on FBAR versus Form 8938.

Form	What it captures	Threshold	Filing
FinCEN Form 114 (FBAR)	Foreign financial accounts, including a SIPP	Aggregate over $10,000 at any time in the calendar year	15 April, automatic extension to 15 October, BSA E-Filing
Form 8938, living abroad, unmarried	Specified foreign financial assets, including an interest in a foreign pension	Over $200,000 on the last day, or over $300,000 at any time	Attached to the income tax return
Form 8938, living abroad, married filing jointly	As above	Over $400,000 on the last day, or over $600,000 at any time	Attached to the income tax return
Form 8938, living in the US, unmarried	As above	Over $50,000 on the last day, or over $75,000 at any time	Attached to the income tax return
Form 8938, living in the US, married filing jointly	As above	Over $100,000 on the last day, or over $150,000 at any time	Attached to the income tax return

Valuation is the practical difficulty, and the IRS guidance is more forgiving than people expect. "In general, the value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year." Where that is not readily available, "the maximum value is the value of the cash and/or other property distributed to you during the year", and if you received no distribution and cannot determine fair market value, "the value of your interest in the plan is zero". A SIPP normally has a clear published value, so the first rule usually applies.

Do you have to file Forms 3520 and 3520-A for a SIPP?

This is the question that used to generate the largest penalties, and Revenue Procedure 2020-17 is the reason it usually does not any more. It exempts an eligible individual's transactions with, and ownership of, an "applicable tax-favored foreign trust" from the section 6048 reporting otherwise made on Forms 3520 and 3520-A. An "eligible individual" is broadly one who is compliant, or comes into compliance, with their US return filing and has reported contributions, earnings or distributions as required.

A "tax-favored foreign retirement trust" must operate "exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits", and must meet each of the revenue procedure's conditions. The ones that decide most SIPP cases are:

1. The trust is "generally exempt from income tax or is otherwise tax-favored" in its jurisdiction — a UK registered pension scheme comfortably meets this.
2. Annual information reporting about the trust, or its participants, is provided or available to the local tax authorities.
3. "Only contributions with respect to income earned from the performance of personal services are permitted."
4. Contributions are limited by a percentage of earned income, or to "an annual limit of $50,000 or less", or to "a lifetime limit of $1,000,000 or less".
5. Withdrawals are conditioned on reaching a specified retirement age, disability or death, or penalties apply to earlier access.

Conditions 3 and 4 are where a personal SIPP needs real thought rather than an assumption, because UK rules permit contributions that are not referenced to earnings from personal services, and the UK annual allowance is not the same measure as the revenue procedure's limits. The conclusion is scheme-specific and fact-specific, and it should be documented in the file rather than assumed from the fact that the SIPP is a pension.

Illustrative example: an American in Leeds holds a SIPP worth about £180,000 and a UK current account. On the US side, the FBAR picks up both because the aggregate is over $10,000; Form 8938 is not triggered if her specified foreign financial assets stay under the abroad thresholds; Article 18(1) defers US tax on the growth; and whether Forms 3520 and 3520-A are needed turns on testing her scheme against Revenue Procedure 2020-17. This is illustrative only; the answer changes with the scheme's rules, the amounts and the filing status.

How are SIPP withdrawals taxed when they start?

Article 17 takes over at that point. Under Article 17(1)(a), pensions and other similar remuneration beneficially owned by a resident of one country "shall be taxable only in that State", and Article 17(1)(b) can exempt an amount that would be exempt in the country where the scheme sits. Both are preserved from the saving clause. Article 17(2), which deals with lump sums and gives the taxing right to the country where the scheme is established, is not preserved — which is why the UK's tax-free lump sum cannot be assumed to be tax-free for a US citizen. Our post on how UK pensions are taxed on a US return works through the drawdown mechanics.

The investments inside the SIPP matter too. UK funds held directly are the classic passive foreign investment company problem covered in our post on why your ISA is a problem on your US tax return; whether and how the PFIC rules reach funds held inside a pension is a separate analysis that depends on the scheme and the holding, and is worth settling before a fund is bought rather than afterwards.

The UK side, briefly

On the UK side a SIPP behaves like any registered pension. GOV.UK gives the annual allowance as "£60,000 this tax year", which is the most that can be saved across pension pots in a tax year before an allowance charge applies, with a lower money purchase annual allowance for those who have flexibly accessed a pension. On the way out, "you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum", subject to a lump sum allowance of £268,275, with a separate lump sum and death benefit allowance of £1,073,100 for certain payments. The UK treatment is the easy half; the mismatch with the US treatment is the reason people come to us.

What people get wrong about SIPP US tax reporting

• Assuming a pension is exempt from the FBAR. The exceptions are for IRAs and US plans under sections 401(a), 403(a) and 403(b), not for foreign pensions.
• Treating Form 8938 as an alternative to the FBAR. They are different rules with different thresholds and both can apply to the same SIPP in the same year.
• Assuming Revenue Procedure 2020-17 covers every SIPP. It exempts trusts that meet all of its conditions, held by individuals who are tax-compliant. The contribution conditions need checking.
• Confusing deferral with exemption. Article 18(1) defers US tax on growth until money is paid out. It does not make the eventual payments tax-free.
• Carrying the UK tax-free lump sum across to the US return. Article 17(2) is outside the saving clause exceptions.
• Reporting a value of zero because it is "locked away". The zero rule applies only where no distribution was received and fair market value cannot be determined; a SIPP with a published valuation does not qualify.

The bottom line

For most Americans in the UK a SIPP is a good place for retirement savings and a demanding one for paperwork: protected from current US tax by Article 18(1), reportable on the FBAR whatever its size relative to other accounts, reportable on Form 8938 above the threshold, and exempt from the foreign trust forms only if it satisfies Revenue Procedure 2020-17. Settle each of those four questions once, write down the answer, and the annual filing becomes routine.

US/UK Cross Border Tax — US CPAs and UK tax advisers working as one team; London, Manchester, New York, San Francisco. If you hold a SIPP and file US returns, ask us to review how it is being reported, or see how we work with Americans living in the UK.