Self-invested personal pension (SIPP) in the UK

U.S. Tax Help When You’re An Expat In The U.K. ➥ Self-invested personal pension (SIPP)

Self-invested personal pension (SIPP)?

Self-invested personal pensions (SIPP) can sometimes be a tricky area to navigate, and what seems like a straightforward pension scheme for a British citizen can actually end up being a lot more complex for a US Citizen or Green Card holder. We’ve spoken to Rose-Ann, a certified EA at Expat US Tax, to help capture all the key information that you need so that you make the right decisions and avoid any pitfalls.

What is a SIPP?

A SIPP is a pension scheme in the United Kingdom which helps you save money. Unlike a typical employer-provided pension, it is viewed as a more attractive pension plan option because of the control that you have in terms of where you want it to invest the money.

Another way in which a SIPP is deemed attractive is that you can contribute up to £40,000 a year into it and this is tax free if you’re a British citizen.

What are the differences between the 3520 and the 3520-A?

The two forms are similar but they’re not the same. The key differences are:

3520 reports:

The existence of the trust.
Informational details like when it was established and the registered address.
Any distributions of the trust to a US person.

3520-A, however, is more detailed and covers things like:

Details of the assets within the trust.
Details of income of the trust.
Reports the names of the US owners of the trust and its US beneficiaries, too.

If you are the owner of the SIPP, then you do need to file both forms every year.

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As a US citizen or Green Card holder, what do I need to be aware of with a SIPP?

The US views a SIPP as a foreign grantor trust, as it is a non-US entity.

It is therefore viewed as a separate legal entity and the trust is considered an extension of you and the assets within the trust are considered owned by you (even though they are held by the trust). It means that the income within the trust should flow through your personal income tax return.

These need to be reported using a 3520 or 3520-A form (or in many circumstances, both).

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So, is a SIPP protected by the US-UK Tax Treaty?

Many foreign grantor trusts are not protected by the US-UK Tax Treaty, but the good news is that a SIPP does qualify. SIPP is considered a qualified pension in the US-UK Tax Treaty and, as such, its earnings are exempt from US tax until such time that the money is withdrawn.

Where this becomes particularly useful is when the SIPP holds investments in foreign mutual funds such as ETFs or Index Funds. In these circumstances, you can avoid having to report on individual Passive Foreign Investment Companies (PFICs) within the SIPP, which can be time-consuming and expensive. So, if you’re a keen investor, then a SIPP can often be a much better way for you to invest and saves a lot of time and money in filing out individual PFICs for every individual foreign mutual funds that your SIPP holds investments in.

What about filing deadlines – do the 3520 and 3520-A get submitted with my usual tax returns?

This is an area where US citizens and green card holders can definitely get caught out, so it is important to understand the key deadlines and procedures involved when filing a 3520 and a 3520-A form.

Firstly, on the 3520. This needs to be paper filed to a special IRS department in Utah by April 15. So far, so straightforward! The 3520-A, however, needs to be a filed a month earlier, by March 15. In many examples that we have seen, late filing of these forms will result in the US slapping a hefty penalty – often at least $10,000 USD per trust – so missing the deadline can become a very expensive mistake.

These forms need to be filed separately as they go to different addresses.

Do these forms not have any extension options?

Luckily, there are extension options and extension filing does play an important role but you should be aware that a separate extension form needs to be filed for both 3520 and 3520-A. For 3520-A this extension needs to be filed on or before March 15 and it provides you with a six month extension and saves you any excessive penalties.

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I’ve missed the deadline, what options are available to me or do I have to pay the penalty?

Once you’ve got to this stage, you have two remaining options:

If you have already received your letter from the IRS outlining the penalty charges then you should speak to us directly. We have been able to assist people in avoiding having to pay the penalty charges, but obviously prevention is better than the cure, which brings us onto the second option…
If you haven’t filed anything yet then the IRS has a program that helps delinquent US tax payers who were not able to file their returns for the previous year, or were able to file but were missing forms due to non-reviewable reasons, like misunderstanding the requirements of the law. This program is called Streamline Foreign Offshore Procedures (SFOP). If your 3520 or 3520-A are filed along with a SFOP and the IRS accepts this then the IRS waives the penalties and this obviously can save you a significant amount of money.

So, it’s important to know that the two reasons that you can use the SFOP amnesty are that you either didn’t know that you had to file, or that you have been filing but that you haven’t been filing correctly.

Three important take away points when it comes to SIPP:

A SIPP can be a great option for a US citizen who is a keen investor because it allows you to choose the investments that the fund makes and it qualifies as a qualified pension through the US-UK Tax Treaty, so, if you invest in foreign mutual funds or ETFs, you can avoid having to report on individual PFICs.
Be aware of the filing deadlines involved as the deadlines for all the forms are not the same and it can get very expensive if you miss a deadline, particularly for the 3520-A form.
If you do miss a deadline, then in some circumstances an exemption known as Streamline Foreign Offshore Procedures can be used to help you escape from heavy penalties so it is a good option for you to be aware of.