Wednesday, 8 March 2017

UK Budget 2017 Announces QROPS 25% Tax Charge On Transfer

UK Budget 2017 – Key QROPS Implications

Need assistance with your QROPS transfer - discuss your options now. Contact me at andrew.holmes@chasebuchanan.com 

In summary
Transfers to QROPS requested on or after the 9th March 2017 will be subject to a 25% tax charge, unless;
1. The QROPS is in the EEA and the Member is also resident in a EEA country.
2. The QROPS and Member are in the same country or territory. This is a limited if negligible part of the market.
3. The QROPS is an employer sponsored occupational scheme, overseas public service pension scheme or a pension scheme established by an international organisation.  

Whilst the pension industry were expecting possible changes in today’s Budget in the form of an overhaul of the UK tax relief system, or further reductions to the Annual/Lifetime Allowance limits, it was unfortunately overseas pension schemes, and specifically QROPS, that were the target of the UK government’s attention.  As I was personally listening in to the Chancellor of the Exchequer, Mr Phillip Hammond’s, first ever Budget speech, the words “introducing measures to tackle abuse of foreign pension schemes” did not sound too convincing and sadly that proved to be the case when the full report was released online as soon as the Chancellor had re-taken his seat.

The specific reference within the full report to QROPS is below:

3.46 Qualifying recognised overseas pension schemes (QROPS): introduction of transfer charge – The government will introduce a 25% charge on transfers to QROPS. This charge is targeted at those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction. 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. (23)”

In addition to this, HMRC have released guidance notes as to how and when the “overseas transfer charge” will apply and in particular what is meant by “genuine need to transfer their pension” (at least, in HMRC’s eyes).  With this in mind, I can summarise the position as follows in respect to standard QROPS business:

·         The new overseas transfer charge comes into play with immediate effect, with its introduction on 9th March 2017.

·         This will apply for any transfers that meet the criteria for the overseas transfer charge to apply when the signed and completed transfer paperwork is received by the UK ceding scheme on or after 9th March 2017.

·         For cases where overseas transfer paperwork has already been submitted to the UK ceding scheme before 9th March 2017, the transfer should be able to proceed without the overseas transfer charge (if applicable) being levied, however, it would be recommended that contact is made with the UK ceding scheme administrators to ensure that they have safely received and logged the transfer request prior to the deadline date.

When does the overseas transfer charge not apply?

1.       If the member is resident in the same country in which the QROPS receiving the transfer is established.

2.       If the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA (Note, for these purposes, the EEA includes any EU member state as well as Liechtenstein, Norway, Iceland and in this context, Gibraltar).

*There are also three other instances documented but these relate mainly to transfers to overseas occupational type arrangements.

What is the effect of these changes in the 3 main QROPS jurisdictions?

·         Transfers into an Isle of Man QROPS for an individual who is resident in the Isle of Man will not attract the overseas transfer charge.  IOM QROPS for individuals resident elsewhere would incur the 25% transfer charge, as IOM is not part of the EEA.

·         Transfers into a Gibraltar QROPS for anyone resident in a country in the EEA will not attract the overseas transfer charge.  For individuals resident outside the EEA, a transfer to a Gibraltar QROPS will incur the 25% transfer charge.

·         Transfers into a Malta QROPS for anyone resident in a country in the EEA will not attract the overseas transfer charge.  For individuals resident outside the EEA, a transfer to a Malta QROPS will incur the 25% transfer charge.

Other important notes regarding the overseas transfer charge:

·         If a member’s benefits transfer successfully to a QROPS on or after 9th March 2017 without the overseas transfer charge applying due to both the individual and the QROPS meeting the relevant criteria, a back-dated tax charge could still be levied in the future if the member’s circumstances change within 5 full tax years of the transfer taking place e.g. if the member was to subsequently move to another country in that 5 year period which was outside the EEA.

·         The reverse is also true in that if an overseas transfer charge was taken at the time of transfer but the member’s circumstances change within 5 full tax years of the transfer taking place, and due to the member’s new residency conditions they now meet the relevant criteria, it may be possible to reclaim the 25% tax that was lifted at the time of transfer.

·         The new conditions also apply to transfers from one QROPS (or former QROPS) to another QROPS e.g. switching between jurisdictions if this is within the “relevant period” i.e. 5 full tax years from the original transfer out of the UK pension plan to the first QROPS arrangement.

Extra Member Payment Charge Provision

·         For transfers to QROPS on or after 6th April 2017, the new legislation widens the scope of UK taxing provisions on payments out of the QROPS from such transferred funds so that, in addition to applying if the member has been a resident in the UK in any one of the last 10 full tax years, they will also apply for the first five full tax years following the original transfer out of the UK regardless of how long the member has been a non-UK resident.

Action steps clients:

·         You should immediately review all pending QROPS transfers where the transfer paperwork has not yet been received by the UK ceding schemes, or by the transferring QROPS scheme administrators (if it is a QROPS to QROPS transfer).

·         If pending QROPS falls into the criteria where the overseas transfer charge would apply, you should not proceed with the transfer at this stage and revert to the respective adviser or contact myself as the transfer will now be subject to a 25% transfer charge.

·         If pending QROPS business falls into the criteria where it would be exempted from the overseas transfer charge, the transfer can proceed as normal.

·         To avoid any uncertainty, you should ensure that contact is made with the transferring schemes and obtain their confirmation that the paperwork is in place and the transfer can proceed based on pre-9th March 2017 conditions.


We appreciate that news of these drastic measures have been sudden for all concerned and the information above is fairly complex, so if you have any queries or want to understand some more of the finer details please do not hesitate to contact me to arrange a call to discuss further as there are QROPS alternatives available.

andrew.holmes@chasebuchanan.com

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