The UK government is to introduce a 25% charge on transfers to qualifying recognised overseas pension schemes (QROPS), effective from 9 March.
In announcing his Spring Budget today, UK Chancellor Phillip Hammond introduced the 25% charge targeted at “those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction”. In the ruling, exceptions will apply to the charge allowing transfers to be made tax-free where people have a genuine need to transfer their pension, including when the individual and the pension are both located within the European Economic Area.
HM Revenue & Customs has put out a policy paper on transfers using QROPS to support the introduction of the levy.
Tax commentator Gerry Brown, pictured left, said that the introduction of a 25% tax charge on the transfer of UK pension savings to a recognised offshore pension scheme (ROPS) will deter many pension schemes from taking this step.
“The government is also to extend from five to ten tax years the period of an individual’s non-UK residence, during which UK tax charges can apply to payments out of pension savings, in overseas pension schemes that have had UK tax relief. I don’t see the proposals as stopping transfers to (say) retirees to (say) Spain.
“As far as I can see if I retire to Spain, become tax resident there and then transfer my UK scheme to a Spanish scheme then the 25% charge won’t apply. This would be logical,” said Brown.
David White, partner and founder of The QROPS Bureau, pictured left, said that he expected this might be a possible change which the HMRC would make post-Brexit but was “surprised that it has been made sooner”.
“The change is in line with the way pension schemes are taxed in the US,” he said. “The reason that transfers to EEA schemes have been left out at the moment is that HMRC can’t tax these transfers under EU freedom of movement of capital rules.”
Tom Selby, senior analyst at AJ Bell, called the 25% levy a “severe deterrent”.
“Broadly, it look like there will only be an exemption to the tax charge where the individual and pension savings are in the same country, both are in the European Economic Area, or the QROPS is provided by the individual’s employer,” he said.
“QROPS were originally designed to make it easier for people leaving the UK to retire to another country and take their pension with them. However, the structure has increasingly been manipulated by those looking to artificially cut their tax bills.
“The introduction of a 25% levy for transfers to a country where the individual is not residing should act as a severe deterrent to abuse of the system.”
Nigel Green, chief executive and founder, deVere, pictured left, called introduction of charges “extremely disappointing”, claiming that the UK government is “using Britons’ pensions as low hanging fruit they can raid whenever they deem it appropriate”.
“It seems to forget that is an individual’s right to transfer their asset to any jurisdiction they see fit and, as such, people should not be penalised should they choose to move it outside the UK for legitimate financial planning reasons,” said Green.
“Despite the move confirmed in the Budget that will make the transfer process more costly for those outside the European Economic Area – for those within it does not change – many of the fundamental advantages and long-term benefits of QROPS for expatriates remain intact.
“Therefore, QROPS will still benefit many people living, or planning to live, overseas and who have a UK pensions,” he added.
Geraint Davies, managing director of Montfort International, said that nationals of other countries, living in the UK, will need specialist financial advice, “now more than ever”.
“Suitability reports will need to be so robust going forward regarding QROPS and pension funding,” he said. “They must consider exit strategy advice as important.”
Davies said that he expects the FCA to be watching this advice with “eagle and suspicious eyes” where it involves anybody who could potentially depart the UK.
“The devil will be in the detail,” he said. “QROPS floggers are about to be flogged with Hammond’s cat of nine tails. Watch with interest how overseas advisors react, their heyday has just seen the sun set.”
Under the heading, ‘HMRC Qualifying recognised overseas pension schemes (QROPS): introduction of a transfer charge’, HMRC stated that the government will legislate in Finance Bill 2017 to apply a 25% tax charge to pension transfers made to QROPS, but added that exceptions will be made to the charge, allowing transfers to be made tax free where people “have a genuine need” to transfer their pension.
These are where:
- both the individual and the pension scheme are in countries within the European Economic Area (EEA) or
- if outside the EEA, both the individual and the pension scheme are in the same country, or
- the QROPS is an occupational pension scheme provided by the individual’s employer
If the individual’s circumstances change within 5 tax years of the transfer, the tax treatment of the transfer will be reconsidered. The changes will take effect for transfers requested on or after 9 March 2017.
HMRC, said that the UK government will also legislate in Finance Bill 2017 to apply UK tax rules to payments from funds that have had UK tax relief and have been transferred, on or after 6 April 2017, to a qualifying recognised overseas pension scheme. UK tax rules will apply to any payments made in the first 5 full tax years following the transfer, regardless of whether the individual is or has been UK resident in that period, it said.