Posted by Nick Day on 23 Jul 2025

HMRC Changes Position on US Pension Lump Sums

HMRC have finally published guidance on what they will deem to be ‘lump sum’ payment from a pension scheme for the purposes of Double Taxation Agreements (DTAs) between the UK and other countries. But this guidance includes a sting in the tail for UK residents with US pension schemes.

The UK tax treatment of payments from a pension varies depending on whether a payment is a lump sum or not. Similarly, the pension provisions of DTAs can differ for lump sums. However, “lump sum” is not defined in UK tax legislation, and until this year there was no HMRC guidance on what constitutes a lump sum payment from a pension scheme.

The HMRC guidance is broadly as expected, whereby one-off, standalone payments of a significant portion of the pension fund are likely to be seen as a lump sum, but payments with some regularity are unlikely to be lump sums (or may be split as part regular income and part lump sum, if there is a substantially larger than normal payment in the regular pattern).

The sting in the tail is that the guidance also includes commentary on the provisions of the UK-US DTA and their impact on lump sum payments, which does not accord with the prevailing practice and interpretation of the DTA.

Speak to a Senior Advisor in Confidence

The UK-US DTA states that a lump sum payment derived from a pension scheme established in one country and beneficially owned by a resident of the other country is taxable only in the country in which the pension scheme is established. On this basis, the prevailing practice since the DTA came into force in 2003 has been for UK residents receiving a lump sum from a US pension scheme to treat the payment as exempt from UK tax under the treaty.

The UK-US treaty is relatively unique in that it includes an overall ‘tax saving’ provision, which allows either country to override some of the treaty provisions and tax its residents and citizens on certain types of income. This is primarily to allow the US to maintain its position of taxing its citizens and green card holders on their worldwide income and gains wherever they are based.

Previously, there has been no indication that HMRC would apply these tax saving provisions to UK residents or citizens. The new guidance confirms that the UK would not tax its citizens under these provisions; however, it indicates that the UK would be willing to override the treaty provisions for UK residents.

On this basis, the guidance appears to be suggesting that UK residents will be subject to UK income tax on lump sum payments from their US pension schemes, even though the treaty denies UK taxing rights over such payments, although double tax relief would be available for any US tax suffered on the lump sum payment.

We note that the guidance simply states the UK-US DTA position: That “the State in which the recipient is resident will also be able to tax the payment” under the tax saving DTA provision. We agree with this interpretation of DTA provisions, but it does not expressly state that HMRC will apply this treatment in all cases, when for the previous 22 years they have appeared to accept that lump sum payments from US pensions are exempt from UK tax. However, this guidance could be an indication that HMRC intend to exercise their tax saving rights under the treaty in future.

If HMRC are taking the position that lump sums received by UK residents are taxable in the UK despite the treaty provision, this begs the question of how to deal with payments already reported as exempt, particularly any payments reported for 2023/24 – prevailing practice was for these payments to be exempt, but HMRC guidance now indicates these are taxable, and the window to amend or open enquiries into these returns is still open.

It remains to be seen if HMRC will open enquiries into lump sum payments reported as exempt, and whether future claims for treaty exemption will be challenged on this basis.

It is worth noting that this is guidance only, which is not necessarily enforceable. However, if you are a UK resident with a US pension fund, you should be aware that this guidance suggests that a lump sum payment from that scheme could be taxable in the UK in future.

There are also potential pitfalls for non-residents of the UK, with the possibility that HMRC may contend that certain payments from UK registered pension schemes are lump sums rather than income payments, and therefore taxable (rather than treaty exempt) for those that are non-residents. The position is further muddied in that it is now possible to receive a series of ‘Uncrystallised Funds Pension Lump Sums’ (UFPLS) from UK Defined Contributions pension funds. It is also not clear at this point as to how HMRC will treat large ‘draw down’ distributions from UK pension funds.

If you would like advice regarding your own position, or would simply like to explore how we can help, please complete the short form below and a senior advisor will be in touch.

Share With