Understanding the US tax implications that can arise from a UK SIPP

Navigating Form 3520/3520-A Filings for UK SIPPs: An Essential Read for US-UK Taxpayers with UK SIPPs

One type of UK pension plan is a self-invested personal pension, commonly referred to as a SIPP. A SIPP can be opened with many providers, and they have become increasingly common with individuals looking to combine pensions. They are commonly established via a deed of trust, and this is where the US tax reporting considerations on Form 3520 can arise.

In broad terms, IRS Form 3520 is an information return that certain US taxpayers must file to report (1) ownership of a foreign trust and/or (2) certain transactions involving a foreign trust.

Under US grantor trust rules, UK SIPPs can be viewed as foreign grantor trusts for US tax purposes. Where this applies applies, Form 3520 reporting may be required and, in many cases, taxpayers prepare a substitute Form 3520 A package because UK SIPP trustees/administrators generally do not file Form 3520 A with the IRS.

Because the US penalty regime for foreign trust reporting can be significant, it is important to review your position carefully. The IRS penalties can generally be the greater of $10,000 or 35% of certain gross reportable amounts in the Form 3520 context, and the greater of $10,000 or 5% of the relevant trust assets in the Form 3520 A context (along with other potential penalties).

When to File for Pensions and SIPPs

Broadly speaking, we expect a Form 3520/3520-A will need to be considered and likely filed if any of the below criteria applies to your UK SIPP:

1. Establishing or Funding a SIPP - You’ve set up the SIPP or transferred any funds or property into it. 
2. Ownership Reporting - If you are treated as an owner of a foreign trust under the relevant rules, Form 3520/3520-A can require annual reporting even if there were no transactions during the year.
3. Receiving Distributions – if you receive a distribution (or are treated as receiving a distribution under the rules), that can also trigger reporting considerations.
4. Thresholds - The IRS asserts that no minimum threshold applies when reporting any income received from a SIPP or when reporting the value on Forms 3520/3520-A.

Form 3520 & Substitute Form 3520-A Filing Obligations

The below encapsulates the Filing obligations for Form 3520/3520-A. Please note that these forms cannot be electronically filed with the IRS, so a paper copy must be filed with the IRS.

The penalties that can arise for Form 3520-A, which is the greater of $10,000 or 5% of the pension value, and Form 3520 which is the greater of $10,00 or 35% of any property distributed from the plan, can be applied.

When filing a Form 3520 with substitute Form 3520-A for a UK SIPP, the filing due date will be 15 April, or 15 June if the taxpayer lives overseas, and an extension can be filed to 15 October.

Additional US Tax Filing Obligations

The UK SIPP can also have reporting requirements on the following forms subject to thresholds and requirements being met.

• FinCEN Form 114 FBAR
• Form 8938
• Form 8833

As part of our US tax filings, these forms should be considered in conjunction with Form 3520 / substitute Form 3520-A.

Guidance for Individuals with US Tax Filings

At Ostberg Sinclair we specialise in providing expertise with navigating the US and UK tax positions for individuals. Please get in touch with us to discuss the US tax reporting considerations for your SIPP and a sustainable, strategic approach to your tax filings.