© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F15. Pension income
ARTICLES 18 AND 19
- Pensions + similar remuneration taxable only in State of residence
"Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State." (Article 18)
- Pension + similar in respect of service rendered to State etc. taxable in that State (unless national of other State)
"2. a) Notwithstanding the provisions of paragraph 1, pensions and other similar remuneration paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
b) However, such pensions and other similar remuneration shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State." (Article 19(2))
- SIPP had sufficient causal connection to employment
"[90] However, the facts surrounding the SIPP Withdrawals are very different to the facts set out above. Relevantly:
(1) Mr Masters built up his entitlement in the Tesco Pension Scheme over a period of 32 years and 8 months of his employment with Tesco;
(2) The Tesco Transfer Amount was the only contribution made to the TJM SIPP and Mr Masters did not make any subsequent contributions to the TJM SIPP; and
(3) The Tesco Transfer Amount had been in the TJM SIPP for only four years before the SIPP Withdrawals were made to Mr Masters. This is a proportionately short period of time compared to Mr Masters' period of pensionable service with Tesco,
[91] We find that the above facts maintain the necessary degree of relevant causal connection between the SIPP Withdrawals and Mr Masters' past employment with Tesco so that the SIPP Withdrawals are "paid in consideration of past employment". None of the facts presented to us break or reduce that causal connection to the degree necessary for us to find that the SIPP Withdrawals were not "paid in consideration of past employment".
[92] We therefore find that the SIPP Withdrawals are within Article 17 of the DTC and, as Mr Masters was resident in Portugal at the time of the SIPP Withdrawals, the DTC allocates the taxation rights over them to Portugal." (Masters v. HMRC [2025] UKFTT 967 (TC), Judge Snelders - in respect of the previous UK/Portugal treaty)
LUMP SUMS
- US treaty grants both States taxing rights
"(4)Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
(5) The provisions of paragraph 4 of this Article shall not affect:
(a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non discrimination), and 26 (Mutual Agreement Procedure) of this Convention; and
(b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.’" (US/UK Treaty, Article 1(4), (5))
"It should be noted that the US regards the lump-sum provision in paragraph 2 of Article 17 of the UK/US DTA to be an anti-avoidance measure. For payments arising in the US, regard must therefore be had for US domestic law.
A particular feature of the UK/US DTA is that, although paragraph 2 of Article 17 gives exclusive taxation rights over lump sum payments to the State in which the payment arises, this is in effect overridden by paragraph 4 of Article 1. The effect of paragraph 4 of Article 1 is that the DTA will not prevent either State from taxing its own residents unless the provision is specifically listed in paragraph 5 of Article 1. This means that although the State in which the pension lump sum arises will be able to tax that payment under Article 17, the State in which the recipient is resident will also be able to tax the payment under Article 1. Relief from double taxation will be available under the treaty in the usual way." (INTM163160)