Your American aunt left you a retirement account. Now two countries want a word

Figures relate to tax year 2025-26 (UK) · 2025 (US)

The letter from the American lawyer says you are a beneficiary of a retirement account. It reads like good news, and mostly it is.

But this is not a cash legacy. An inherited IRA is a tax wrapper with an American timetable attached, and nobody has yet paid tax on the money inside it. Britain has its own view of what happens when you take it out.

Key takeaways

• The money inside was never taxed, so withdrawals are income rather than a legacy.
• Most non-spouse beneficiaries must empty the account within ten years.
• American withholding applies to payments out, often at 30% before any treaty claim.
• Britain generally taxes the withdrawal as foreign income in the year you receive it.
• Spreading withdrawals across the ten years usually beats a single lump sum.
• The two tax years do not align, which complicates the credit claim.

What is an inherited IRA?

It is an American retirement account that has passed to a beneficiary on death. The account stays in its wrapper rather than paying out automatically, and the provider retitles it to show where it came from. Per IRS guidance, the beneficiary cannot simply treat it as their own unless they were the spouse.

The same logic applies to an inherited workplace plan, though the provider rules differ.

So an inherited IRA is an account, not a cheque. That distinction drives everything else.

Why is the money taxable at all?

Because nobody has paid tax on it yet. Contributions went in before tax and the growth compounded untaxed for decades, so an inherited IRA carries deferred tax rather than none. When money leaves the account it becomes ordinary income in the hands of whoever receives it.

A Roth account works differently, because the tax already went in on the way.

Check which type you have inherited before doing anything. The answer changes the whole plan.

How long do you have to empty it?

An inherited IRA runs on a ten year clock for most non-spouse beneficiaries. An inherited IRA must empty by the end of the tenth year following the death, and in some cases annual withdrawals are required along the way. A surviving spouse has more options.

Certain beneficiaries, including minor children and disabled beneficiaries, sit outside the ten year rule.

Confirm which category applies early. The timetable shapes every decision that follows.

What gets withheld when you take money out?

American withholding applies to payments made to a non-resident, and the default rate is 30%. The provider deducts it before the money reaches you, so the first payment often arrives noticeably smaller than expected. A treaty claim can reduce or remove it, but only if the paperwork is in place first.

That paperwork means a withholding certificate lodged with the provider.

We see people take a distribution first and ask about the forms afterwards. Reclaiming withheld tax takes far longer.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Ruth lives in Manchester and inherits a $300,000 account from her American uncle in 2026. She is not his spouse, so the ten year clock starts.

Taking the lot in one year adds roughly £230,000 to her British income, pushing most of it into the top rate. American withholding bites first, and she waits months to sort the credit.

Spreading it across ten years adds around £23,000 a year instead. Much of that can sit in lower British bands, and the annual credit claim is straightforward.

Same money, same account, and a difference measured in tens of thousands.

How does Britain tax the withdrawal?

Generally as foreign income in the tax year you receive it, taxed at your marginal rate alongside everything else. HMRC does not treat it as a legacy, because you are receiving income from an account rather than a capital sum from an estate. Inheritance tax is a separate question handled by the estate.

So a large withdrawal can push your other income into a higher band.

Our guide to US retirement accounts in the UK covers the position for accounts you own yourself.

The timetable and the tax at a glance

Why does the tax year mismatch matter?

Because the credit has to line up. America runs to 31 December and Britain to 5 April, so a December withdrawal and a March one fall into different British years despite sitting in the same American one. Matching the tax to the income takes care.

Take distributions early in the calendar year where you can. It keeps both years aligned.

Our guide to the foreign tax credit covers the mechanics of the claim.

What if you are also a US citizen?

Then you file in both countries anyway, and the withholding question largely disappears because you report the distribution on your own American return. The planning shifts to which country taxes first and how the credit flows between them.

Dual filers often have more room to plan, not less.

Watch the interaction with your other American income. A large distribution can lift you into a higher bracket and drag other reliefs down with it.

But the ten year clock applies the same way. Citizenship does not extend it.

Can you move it to a UK pension?

No. There is no route to transfer an inherited American retirement account into a British pension, and anyone who suggests otherwise is describing something else. The account stays where it is until it empties.

You can usually move it between American providers, which is a different thing.

A transfer between providers is not a distribution, so it triggers no tax. Get the paperwork right, because a mistake here creates a taxable event.

Use a direct trustee to trustee transfer. Money touching your own account on the way turns the whole amount into a taxable distribution.

What if the estate also owes tax?

That sits separately and it falls on the estate rather than on you. American estate tax and British inheritance tax both look at the value passing on death, while your income tax looks at what leaves the account afterwards. The two rarely meet.

Ask the executors what they have already settled.

Our guide to US-UK inheritance tax sets out how the death side works.

What if there are several beneficiaries?

The account usually splits into separate shares, one for each beneficiary. Each share then runs its own clock and its own withdrawals, so your timetable does not depend on anyone else. Splitting early matters, because a delay can tie everyone to the least favourable rule.

Ask the provider to divide the account before the first distribution.

Beneficiaries in different countries have different needs. A shared withdrawal plan rarely suits all of them.

Does currency movement affect the tax?

Yes, on the British side. You convert each withdrawal to sterling at the rate on the day you receive it, so a weak pound inflates the figure Britain taxes. The dollar amount may be identical across two years and the sterling amount quite different.

That cuts both ways, and it gives you a small planning lever.

Record the rate you used for each payment. Reconstructing it later wastes time.

What happens if you move country?

The British tax follows your residence, so leaving Britain part way through the window changes who taxes the remaining withdrawals. Somebody moving to a country with lower rates may prefer to wait, while somebody moving to a higher-rate country may prefer to accelerate.

The American withholding position can change too, since it depends on the treaty with your new country.

So revisit the plan whenever you move. The ten year deadline does not move with you.

How to handle it

1. Confirm whether the account is a traditional or a Roth arrangement.
2. Establish your beneficiary category and the deadline that applies to you.
3. Lodge a withholding certificate with the provider before taking anything.
4. Model the British tax on several withdrawal patterns across the window.
5. Time distributions early in the calendar year to align the two tax years.
6. Keep the provider statements and the withholding evidence for each year.
7. Review the plan annually, because your other income will change.

What paperwork will the provider want?

A withholding certificate confirming who you are and where you pay tax, and usually an American taxpayer reference number. Some providers ask for a certified copy of your passport as well. Allow several weeks, and longer if you must apply for a reference number first.

Start this before the estate finishes distributing.

Ask whether they will pay into a British bank account or only an American one. Some will not send funds abroad, which means opening an account in America first.

Some providers refuse to hold accounts for overseas beneficiaries at all. Ask that question early, because it changes the timetable.

Does an inherited IRA go on your UK return?

The withdrawals do, as foreign income for the year you receive them. The account itself is not reportable in the way a foreign bank account might be, but any tax withheld in America belongs on the return too, since that is what supports your credit claim.

Report the gross figure and claim the credit separately. Netting the two hides the claim.

Keep the provider statement for each payment. HMRC may ask to see it.

What does it cost to get this right?

Less than one badly timed withdrawal. Modelling the window and lodging the withholding paperwork is a modest piece of work, and it typically saves several times its cost in the first year alone.

The expensive version is the one where somebody empties the account in year one.

We see that happen most often when nobody explained the ten year rule at the outset.

Mistakes and penalties we see with an inherited IRA

The first is emptying an inherited IRA in a single year. It is the single most expensive thing a beneficiary can do.

The second is withdrawing before lodging the withholding paperwork. Recovering over-withheld tax takes months and sometimes a year.

The third is missing a required annual withdrawal where one applies. America charges a penalty on the shortfall.

The fourth is forgetting the account on British reporting. An overseas account holding investments belongs on your return.

How US UK Tax Accountants helps

We confirm which rules apply to your beneficiary category, get the withholding paperwork lodged before any money moves, and model the withdrawal pattern across the full window on both sides. Then we prepare the returns each year.

Where the provider already withheld tax, we handle the recovery. Our treaty relief service covers the claim.

If you have inherited an American retirement account, get in touch before the first withdrawal. Almost every saving available here depends on acting before the money moves.

Last reviewed 25 September 2026. This article is general information and not personal tax advice. Every inheritance turns on its own facts, so take advice on yours before withdrawing anything.