A US person who holds funds inside a UK pension often does not need to file Form 8621 for them, but only where a Treasury regulation applies. It excuses the form for a member of an arrangement that a US income tax treaty treats as a pension fund, where the treaty taxes the member only when benefits are paid out. The exception is a rule about the arrangement, and it does not cover every UK wrapper that carries a tax advantage.
This post is for US citizens and green card holders with a SIPP, a workplace scheme or an older personal pension that invests in UK unit trusts, OEICs or investment trusts. It goes further than the PFIC section of our guide to US-UK tax for founders, fund managers and executives. It covers the text of the exception, what it leaves in place, how it differs from the small-holding exception and from Rev. Proc. 2020-17, and what to keep on file.
Do you file Form 8621 for funds held inside a UK pension
Not where the pension exception applies. The Instructions for Form 8621 (opens the official IRS page in a new tab) refer to Treasury Regulation section 1.1298-1(c)(4), which removes the filing requirement for a PFIC held through an arrangement the treaty treats as a pension fund, where the treaty taxes the income only on distribution.
Outside that exception the ordinary rule applies. A US person who is a shareholder of a PFIC files Form 8621 for each one, and a fund held in a pension is not exempt merely because the pension is registered with HMRC. UK registration is a UK tax status. The exception turns on what the US-UK treaty says about the arrangement and its members.
That is why the answer for two members of the same scheme can differ. The treaty provisions on pensions apply by reference to the scheme and to where the member lives, so a member who has moved country, or a scheme that is not the kind the treaty describes, needs a separate look. The guide takes the same cautious line, and nothing in this post goes beyond it.
What does the pension exception actually say
It is a short regulation with three working parts. There has to be an arrangement the treaty treats as a pension fund. The shareholder has to be a member, beneficiary or participant in it. And under the treaty the income of the arrangement has to be taxable to the shareholder only when and to the extent it is distributed.
Each part has to be met, and the third is the one that carries the weight. A treaty that merely recognises a scheme for UK purposes is not enough. The treaty has to defer US tax on the income of the scheme until payout. The US-UK tax treaty (opens the official IRS page in a new tab) contains a pension article of that kind, and the regulation looks to the treaty, not to the label used by the scheme provider.
The instructions cover the point as an exception to the filing duty, not as a ruling that the fund is not a PFIC. The fund can still meet the PFIC tests. What changes is that the shareholder is excused from the form while the three conditions hold, which is why the position needs to be checked afresh if the member's circumstances change.
- An arrangement that the treaty treats as a pension fund, not merely one registered in the UK
- A shareholder who is a member, beneficiary or participant in that arrangement
- Treaty terms under which income is taxed only when and to the extent it is distributed
Which UK wrappers fall inside the exception
Registered pension schemes are the natural candidates: workplace defined contribution schemes, SIPPs and other personal pensions that GOV.UK describes as private pensions (opens the official GOV.UK page in a new tab). Whether a particular scheme meets the treaty definition should be confirmed from its rules and status. A provider's confirmation of HMRC registration helps, but it is not the treaty test.
An ISA is outside the exception altogether. It has no US tax protection, so funds inside an ISA (opens the official GOV.UK page in a new tab) are reported as if held directly, as our post on why a stocks and shares ISA worries the IRS explains. Premium Bonds, junior ISAs and UK investment bonds sit in the same position of needing their own analysis, and our posts on premium bonds and junior ISAs and investment bonds and life policies cover them.
Overseas pensions that the member has moved to the UK, and schemes set up in other countries, depend on the treaty between the US and the country concerned. This post deals only with the US-UK treaty and a UK scheme. Where a scheme is held in a trust or an insurance wrapper, the form of the wrapper can change which rules apply, and that is a reason to take advice before treating the exception as settled.
How is the pension exception different from the small-holding exception
The small-holding exception is a separate rule about size. Where total PFIC holdings are at or below the figure in the regulation, annual reporting under the default regime can be excused. The pension exception does not depend on size at all, so a large pension pot can qualify while a small taxable account does not.
The size test has conditions of its own. For a single filer the aggregate is $25,000, and for a joint return $50,000, and it does not help a holder who has had an excess distribution or a disposal in the year. The exceptions are independent, so a holder can fail one and meet the other. Our guide and our post on QEF and mark-to-market elections cover what follows when neither applies.
In practice the pension funds are reviewed first and set aside if the pension exception holds. The taxable holdings, such as funds bought through a general investment account or held in an ISA, are then tested against the size rule and, if it fails, reported fund by fund. Keeping the two groups apart on the schedule makes that review simpler and makes the position easier to explain if the IRS asks about it.
Does Rev. Proc. 2020-17 change the answer
No, because it answers a different question. Rev. Proc. 2020-17 concerns information reporting on Forms 3520 and 3520-A for certain tax-favoured foreign retirement and non-retirement trusts, and it also offers a route to penalty relief. It is not the source of the Form 8621 pension exception, and satisfying one does not satisfy the other.
The two sets of rules should therefore be tested separately for each scheme. A scheme can meet the Form 8621 exception and still need a view on Form 3520 reporting, or the reverse. Whether a particular UK scheme meets the conditions of the revenue procedure depends on its structure and on how contributions and benefits work, and we do not state that every UK scheme does.
Neither rule removes other reporting. A pension with a value can still be relevant to the FBAR and to Form 8938, as our post on whether a UK pension is reportable on the FBAR explains. The income side is separate again: payments out of the scheme are dealt with on the return, and our post on the UK pension lump sum covers the contested part.
What should you do if your SIPP holds funds
Take a US citizen employed in Manchester who has a SIPP invested in several OEICs and an investment trust, and who also holds a smaller stocks and shares ISA. The SIPP is checked against the treaty exception and, if it holds, the funds inside it are excused from Form 8621. The ISA funds are not, and are tested against the size rule and then reported if it fails.
Start with the scheme's status and the member's residence history, then decide how the position is to be documented. A treaty-based position may need to be disclosed with the return, and the page on Form 8833 (opens the official IRS page in a new tab) explains the disclosure. Our page on the US-UK tax treaty sets out where it fits, and a note of the reasoning should stay in the file for the open years.
If the exception does not apply, the funds inside the pension are treated like any others and the default regime may apply. Our PFIC reporting and US-UK pensions services review each scheme and each fund, and treaty relief work covers the disclosure. The wider position is in the guide to US-UK tax for founders, fund managers and executives, and you can contact US UK Tax Returns with a list of schemes.
- Scheme rules and a statement of registered status from the provider
- A list of funds held inside the scheme at each year end
- The member's residence history in both countries
- A note of the treaty reasoning and whether a disclosure was made
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
