Minimizing US and UK Tax When Inheriting a US Retirement Account

Minimizing tax when inheriting a US retirement account as a UK resident hinges on three levers: the US-UK treaty's pension article, the US foreign tax credit, and the timing of withdrawals within the SECURE Act's 10-year window. Get these right and a UK-resident beneficiary of an IRA or 401(k) usually pays tax once, at UK rates, rather than twice.

By the TaxYork Cross-Border Tax Team — reviewed by a US-UK dual-qualified adviser (CPA / Enrolled Agent).

How is an inherited US IRA or 401(k) taxed when you live in the UK?

A traditional IRA or 401(k) you inherit is taxed as ordinary income when you withdraw it, in both countries. There is no tax-free step-up in value on the pre-tax balance. The UK taxes you because you are resident here; the US taxes the account because it is a US-source pension. The treaty and foreign tax credits prevent the same money from being taxed twice.

US law refers to income from an inherited pre-tax retirement account as income in respect of a decedent (IRD). Unlike shares or a house, where a beneficiary usually gets a stepped-up cost basis, the deferred income inside a traditional IRA never escapes US tax during the owner's life. It carries that latent liability across to you. Every dollar of the pre-tax balance is ordinary income when distributed, and the UK treats it as foreign pension income under HMRC's rules on tax on pensions.

The two-country picture in one paragraph

For a UK-resident beneficiary, the practical position is this. The US asserts a right to tax distributions from a US pension and may withhold at source. The UK taxes the same distributions as your foreign pension income at your marginal rate. The US-UK Double Taxation Convention and the foreign tax credit mechanism reconcile the two so you are not left paying a combined rate above the higher of the two systems.

What does the US-UK treaty say about who taxes the distributions?

Article 17 of the treaty generally gives the country of residence the primary right to tax periodic pension distributions. So a UK resident drawing regular payments from an inherited IRA is, in principle, taxable in the UK, and can reduce or remove US withholding by filing a treaty claim. Lump sums are treated differently and remain exposed to US tax.

Periodic payments versus lump sums

Under Article 17(1), pensions and similar remuneration paid to a resident of one state are taxable only in that state of residence. A UK resident taking a scheduled, periodic distribution from an inherited IRA can therefore claim exemption from US tax on those payments by filing Form W-8BEN with the plan administrator and citing the income tax treaty. That normally strips out the default 30% US withholding on payments to a foreign person.

Article 17(2) is the trap. A lump-sum payment from a pension scheme is taxable only in the state where the scheme is established — the US. HMRC confirmed its position in March 2025 that lump-sum distributions from taxable US pension plans are also subject to UK tax, with a foreign tax credit for the US tax paid. A lump sum is therefore the worst of both worlds: fully US-taxable and UK-taxable, with a credit stopping literal double tax but not reducing you to a single rate.What is the SECURE Act 10-year rule and why does it matter?

Most non-spouse beneficiaries must empty an inherited IRA or 401(k) within ten years of the original owner's death. You no longer get to spread withdrawals across your own lifetime. For a UK resident, that ten-year window is the single biggest planning lever because it controls how much taxable income lands in each UK tax year.

When annual withdrawals are also required

The SECURE Act replaced the old "stretch IRA" for deaths from 2020 onward. The IRS finalized the rules in July 2024 and began enforcing them in 2025. If the original owner has already reached their required beginning date for lifetime distributions, a non-spouse beneficiary must take an annual required minimum distribution (RMD) in years 1 to 9 and empty the account by the end of year 10. Where the owner died before their required beginning date, there are no compulsory annual withdrawals — you simply clear the balance by year ten. Missing a required distribution can trigger a US penalty of up to 25% of the shortfall.

Certain beneficiaries escape the 10-year rule.

The ten-year clock does not apply to eligible designated beneficiaries: a surviving spouse, a minor child of the deceased, a disabled or chronically ill person, or a beneficiary no more than ten years younger than the deceased. These beneficiaries may still use life-expectancy distributions, which can materially soften the UK tax hit by keeping annual income low.

How do you actually minimize the combined US and UK bill?

You minimize it by spreading withdrawals to remain within lower UK tax bands, filing a treaty claim to remove US withholding on periodic payments, and using the foreign tax credit wherever US tax is unavoidable. The order in which US and UK tax is applied and the matching of the credit to the right year are where most of the savings are won or lost.

1. Spread the drawdown across the ten years

UK income tax rates for 2025/26 are 20% (basic), 40% (higher), and 45% (additional), with the higher-rate threshold at £50,270 and the additional-rate threshold at £125,140. A large lump sum can push a UK basic-rate taxpayer straight into the 40% or 45% band and can even erode the £12,570 personal allowance above £100,000 of income. Level annual withdrawals across the full ten-year window keep more of the money inside the 20% band.

2. File Form W-8BEN to claim the treaty

Give the plan administrator a completed W-8BEN claiming the Article 17 treaty position on periodic payments. You will need a US Taxpayer Identification Number (an ITIN if you are not a US person) for the reduced rate to apply. Without documentation, the plan defaults to 30% US withholding, and recovering over-withheld tax means filing a US return.

3. Use the foreign tax credit on whatever the US taxes

Where US tax is properly due — typically on a lump sum, or on any beneficiary who is also a US person and caught by the treaty's saving clause — claim relief so the same income is not taxed twice. A US person claims the US foreign tax credit for UK tax paid; a UK resident who is not a US person claims UK foreign tax credit relief for any US tax. Matching the credit to the correct tax year, given the different US (calendar) and UK (6 April) year-ends, is essential.

4. Treat an inherited Roth IRA differently

A Roth IRA was funded with after-tax dollars. Qualified distributions are free of US tax, and the treaty generally allows the UK to treat qualified Roth distributions as tax-free pension income as well. If you inherit both a traditional and a Roth account, drawing from the Roth has little or no tax cost, so sequencing matters.

Does the US estate tax apply before you even receive the money?

It can. A US retirement account is a US-situs asset, and the estate of a non-US-domiciled person gets only a $60,000 US estate tax exemption against US-situs assets, versus roughly $13.99 million for a US person in 2025. The US-UK estate tax treaty can restore a far larger exemption amount, so domicile analysis matters before any distributions are made.

The $60,000 trap and the treaty fix

If the deceased was not US-domiciled, US-situs assets above $60,000 are exposed to US estate tax at rates up to 40%, and the estate may need to file Form 706-NA. A US retirement account is a US-situs asset. The US-UK Estate and Gift Tax Treaty (1980) can let a UK-domiciled estate claim a proportionate share of the much larger US unified credit, broadly the US exemption multiplied by US assets over the worldwide estate. This is technical, deadline-driven work — get it wrong and 40% can be lost before the beneficiary sees a penny.

Anonymized case study: a UK-resident daughter inherits a $400,000 IRA

"Priya" (details changed) is a UK resident and a British national, not a US person. Her late father, a UK-domiciled retiree, left a traditional IRA worth roughly $400,000. Her US broker's default was to treat any distribution as a lump sum with 30% withholding, and she was on the point of cashing the whole account in one year — which would have pushed most of the income into UK 45% tax and wiped out her personal allowance.

We restructured it. We confirmed her father's non-US domicile and used the estate tax treaty to remove the US estate tax exposure. We had her obtain an ITIN and file a W-8BEN, then set up scheduled periodic distributions across the ten-year window, claiming the Article 17(1) treaty position so US withholding fell away on those payments. Spreading the income kept most of it inside the UK basic and higher-rate bands rather than the additional rate. The combined lifetime tax fell by a five-figure sum against the cash-it-all-in plan, and she stopped lending the IRS 30% of her money interest-free.

Speak to a US-UK cross-border tax adviser.

Inheriting a US retirement account across the Atlantic is one of the few situations where a single wrong click — cashing the account in one lump — can cost tens of thousands. TaxYork handles the treaty claims, the ITIN, the US and UK returns, and the estate tax position together, so the pieces actually fit. Contact us at hello@taxyork.com | 020 3488 8606 | taxyork.com, and we will map your ten-year drawdown before your first distribution.