Inheriting a UK Pension When You Are a US Person: How Two Tax Systems Treat the Same Money

When a UK pension passes to a US person, two tax systems look at the same money and reach their conclusions independently. The UK asks what form the benefit takes and, at present, how old the member was at death; the United States taxes its citizens on worldwide income and applies its own characterisation. The uncomfortable case is common: a payment the UK treats as tax-free while the US treats it as income, because where no UK tax is paid there is no foreign tax credit to claim.

Key takeaways

• UK treatment has historically turned on the age of the deceased and the form of the benefit. GOV.UK says a lump sum paid after a death under 75 carries no tax unless it exceeds the lump sum and death benefit allowance, and that where the member was 75 or over the provider deducts Income Tax.
• A lump sum paid more than two years after the provider is told of the death is taxed as UK income on the whole amount.
• From 6 April 2027 most unused pension funds and death benefits fall within the estate for UK Inheritance Tax, with personal representatives liable to report and pay.
• The US taxes a beneficiary under US rules regardless of the UK outcome, and whether the receipt is a bequest or income for US purposes decides the bill.
• A UK-tax-free payment leaves nothing to credit, so the US tax stands alone.
• FBAR, Form 8938 and, where a trust or estate is involved, Form 3520 can all follow.

How a UK pension passes to a beneficiary

Most private UK pensions built up over the last two decades are defined contribution: a pot of invested money rather than a promise of a salary-linked income. On death the pot does not simply follow the will. The scheme administrator generally has discretion over who receives it, guided by the member's expression of wish, and a beneficiary is often offered a choice of form — a lump sum, a beneficiary's drawdown account in their own name, or an annuity. Defined benefit schemes work differently, typically paying a dependant's pension under scheme rules.

That choice of form determines the UK treatment, the US treatment and the timing of both. It is usually made under time pressure, by someone recently bereaved, on the strength of a provider's form — the most common point at which value is quietly lost.

What the UK currently charges

GOV.UK's guidance on tax on pension death benefits rests on two variables: the age of the deceased and the form the benefit takes.

• Died under 75. For a lump sum, GOV.UK states there is no tax unless it is above the pension pot owner's lump sum and death benefit allowance. Confirm the current allowance with the scheme administrator rather than a figure found online; these allowances were reformed recently.
• Died at 75 or over. GOV.UK states that Income Tax is deducted by the provider, so the payment is taxed as your income.
• The two-year rule. Where a lump sum is paid more than two years after the provider is told of the death, GOV.UK states you pay Income Tax on the whole lump sum.
• Reporting. GOV.UK states the estate's personal representative must tell HMRC within 13 months of the death, or 30 days after they realise tax is owed, whichever is later.

Two cautions. The beneficiary drawdown position is more nuanced than any summary can carry, and GOV.UK itself distinguishes between older and newer drawdown funds. And if you are not UK resident, whether the UK charges you at all turns on your residence position and on the treaty.

What changes from April 2027

HMRC has published the measure bringing pensions within Inheritance Tax. GOV.UK confirms it takes effect in respect of pension member deaths on or after 6 April 2027, and that personal representatives, rather than scheme administrators, will be liable for reporting and paying the Inheritance Tax due on unused pension funds and death benefits.

Not everything is in scope: GOV.UK states that death in service benefits payable from a registered pension scheme, and dependants' scheme pensions from a defined benefit or collective money purchase arrangement, are excluded. The spouse exemption also survives, GOV.UK confirming that the existing principles exempting death benefits passing to a surviving spouse or civil partner, and to registered charities, will be maintained. Our note on UK inheritance tax and long-term residence for US citizens covers the estate side, and US estate and gift tax for Americans in the UK the other direction.

The US side: your tax is decided by US rules

The UK's answer does not bind the United States. IRS guidance on the taxation of foreign pension and annuity distributions states the general rule plainly: the taxable amount is generally the gross distribution minus the cost — the investment in the contract — and income from a foreign pension may be fully or partly taxable even though no Form 1099 ever arrives.

That phrase does a great deal of work. In a UK pension funded by tax-relieved contributions and untaxed growth, there may be very little cost to subtract, so a payment the UK treats as entirely tax-free can be very largely taxable in the United States.

Bequest or income? Why the distinction decides the bill

There is a persistent assumption that because this money arrived through a death it is an inheritance, and inheritances are not taxed. That is half right, and it is the expensive half.

Property genuinely received as a bequest is generally excluded from the recipient's gross income. But a pension death benefit is not obviously property the deceased owned outright and left to you. It is more naturally seen as a retirement benefit paid to a nominated beneficiary — money never taxed in the member's hands, now paid to someone else. US tax has a long-standing principle for exactly that: income the decedent had earned or become entitled to but was never taxed on keeps its character in the hands of whoever receives it.

Which analysis applies depends on the scheme rules, the nomination, whether the administrator exercised a discretion, and the form of benefit taken. Practitioners genuinely differ here, and a confident one-line answer should make you cautious rather than reassured. What is not in doubt is that "it came from a death, so it is not taxable" is not a position to rely on.

What the treaty does, and what it cannot do

The US-UK income tax treaty contains a pension article. The IRS explains that the pension article of most income tax treaties allows for exclusive taxation of pensions or annuities under the domestic law of the country of residence, and that some treaties restrict that right or provide special rules for lump-sum distributions.

The limit on all of it is the saving clause, which the IRS describes as preserving the right of the United States to tax its citizens and residents on worldwide income as if there were no treaty, subject only to specific exceptions. A US citizen beneficiary therefore usually cannot use the treaty to make a UK pension payment vanish from a US return; its real work is allocating taxing rights and, where an exception applies, modifying the result. Whether an exception reaches your facts is a question for the treaty text itself, held on the IRS United Kingdom treaty documents page.

The credit that is not there

The IRS rule for the foreign tax credit is that you must have paid or accrued foreign taxes to a foreign country and be subject to US tax on the same income, and that generally only income, war profits and excess profits taxes qualify. Read that against the UK position: where the member died under 75 and the lump sum falls within the allowance, the UK charges nothing — and nothing paid means nothing to credit, so the US charge stands alone and unrelieved.

The consequence is counter-intuitive. The UK-favourable case can be the US-expensive one, while a benefit that does suffer UK Income Tax may generate a credit that shelters much of the US charge. Timing compounds it, because the two charges can fall in different tax years and a credit is of limited use in a year with no matching income. Our article on US tax on UK pensions and SIPPs explains the same machinery for your own pension.

Reporting that follows the money

Separate from tax, and often sharper in its consequences, is the reporting.

• FBAR. Required where a US person's foreign financial accounts exceed $10,000 in aggregate at any time during the calendar year, and the IRS is explicit that whether an account produced taxable income has no bearing on whether it is reportable. The rules contain an exception for accounts held in a retirement plan of which you are a participant or beneficiary, but whether a given UK arrangement falls inside it is contested — answer it, do not assume it. A UK bank account receiving the payment is plainly in scope.
• Form 8938. Thresholds are higher and depend on where you live: more than $200,000 on the last day of the year or $300,000 at any time for an unmarried filer living abroad, and $400,000 and $600,000 for married filing jointly, against $50,000 and $75,000, and $100,000 and $150,000, for filers in the United States.
• Form 3520. The IRS states that US persons file it to report certain transactions with foreign trusts, ownership of foreign trusts under Internal Revenue Code sections 671 through 679, and large gifts or bequests from certain foreign persons — those from a nonresident alien individual or a foreign estate being reportable above $100,000 in aggregate for the year.

Whether any Form 3520 category is triggered here depends entirely on the facts: how the arrangement is characterised, whether anything passes through the deceased's estate, and whether a trust is involved. Many UK schemes are constituted under trust, which is why the question arises and why it cannot be answered generically — our note on foreign trusts and Form 3520 for US persons in the UK sets out how we work through it. Penalties attach to the failure to file, not to tax owed, so ask early.

Before you draw anything

The form and the timing of the withdrawal drive the tax on both sides, and once the money is paid the choice cannot be unwound.

• A lump sum and a beneficiary drawdown account can produce very different results across the two systems, and drawdown keeps the decision open.
• Delay has a hard edge, because the two-year rule can turn a tax-free UK lump sum into a fully taxable one.
• A payment landing in the wrong US tax year can strand a credit that would otherwise have sheltered it.
• Where the death falls on or after 6 April 2027, the Inheritance Tax position needs to be modelled alongside the income tax position, not after it.

None of this requires a rushed decision — only that the provider is notified, the paperwork read, and the position mapped before a form is signed.

How we approach it

We begin by establishing what the arrangement is and what the scheme rules permit, then run the UK and US analyses side by side across the options and payment years. A licensed CPA or Enrolled Agent reviews and signs off every US filing that leaves the firm, and the UK side is reviewed by an ACCA-qualified accountant, so the two analyses are checked against one another rather than assembled separately. Our US-UK expat tax accountant page sets out how the engagement works.

If you have been told you are a beneficiary and have not yet replied to the provider, that is the moment to speak to someone. Book a confidential consultation and we will map the position before anything is paid.

This article is general information, not tax or legal advice, and does not create a professional relationship. UK and US rules, allowances and thresholds change, the UK Inheritance Tax treatment of pensions changes for deaths on or after 6 April 2027, and the treatment of any particular death benefit depends on the scheme rules and your own circumstances; confirm the current position with a licensed professional before acting.

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Reviewed by a CPA / Enrolled Agent. Last updated: 16 September 2026.

Official sources: GOV.UK — Tax on a private pension you inherit | GOV.UK — Inheritance Tax on unused pension funds and death benefits | IRS — The taxation of foreign pension and annuity distributions | IRS — United Kingdom (UK) tax treaty documents | IRS — Foreign tax credit | IRS — Report of Foreign Bank and Financial Accounts (FBAR) | IRS — Comparison of Form 8938 and FBAR requirements | IRS — About Form 3520 | IRS — Gifts from a foreign person