Finance Bill 2017 – Changes to Overseas Pensions
In the recent Autumn Statement 2016, the Chancellor indicated that further clarification to the QROPS regime would be issued in the Finance Bill, which was published on 5 December 2016.
The detail of the Finance Bill, relating to overseas pensions can be found at https://www.gov.uk/government/publications/foreign-pension-schemes/foreign-pension-schemes and at overseas pension schemes guidance
These changes, which take effect from 6 April 2017, will bring the tax treatment of QROPS into line with UK pensions and the following are the main points, with The QROPS Bureau's comments in italics :
• Where a foreign pension or lump sum is paid to a UK resident, 100% of the pension arising will be chargeable to UK tax (to the same extent as if they had been paid from a registered pension scheme). Previously only 90% of overseas pension income was taxable in the hands of a UK resident. This change has been expected for a while having been identified as an anomaly by the Treasury/HMRC in previous statements.
• No new pension schemes can be established under section 615 of ICTA 1988, and no further contributions can be made to existing schemes. Funds accrued in a section 615 scheme before 6 April 2017 will continue to be paid out using the existing rules. This puts an end to the "Section 615" pension regime which allowed overseas based employees working for UK employers to contribute ( and have their employer contribute) to a pension scheme and to have the benefits paid out in a highly tax efficient manner. Again this change was expected with some industry commentators believing these schemes were "too good to be true".
• The tax treatment of funds in pension schemes based outside the UK will be more closely aligned with that of UK-based Registered Pension Schemes. The detail behind this statement is still unclear and more detail will be required to fully understand the implications.
• The 70% rule (ie that 70% of a pension fund must be used to provide an income for life) will be removed from the conditions that a pension scheme has to meet to be an 'overseas pension scheme' or a 'recognised overseas pension scheme' and the pension age test revised so that additional payments may be made and the test still be met. As a result if a non-occupational pension scheme is not regulated and the provider of that scheme is not regulated, it will not be able to be a QOPS or QROPS. The change to the 70/30 rule has been anticipated for some time following the introduction of pension freedoms into the UK pensions regime in April 2015. Whilst Malta already allows flexible drawdown, other jurisdictions such as Gibraltar and the Isle of Man will have to bring their local rules up to date to allow flexible drawdown. The last sentence could lead to some QROPS being removed from the HMRC list if HMRC do not deem the QROPS scheme or its provider to be properly regulated in its country of residence. In reality, The QROPS Bureau do not believe that this will cause any major problems as the main QROPS jurisdictions such as Malta, Gibraltar, Isle of Man require that the pensions schemes are locally regulated in any case.
• From 6 April 2017 to be a QROPS a pension scheme must be established in one of the following:
1. an EU member state (other than the UK), Norway, Liechtenstein or Iceland
2. a country or territory with which the UK has a double taxation agreement that makes provision for exchange of information and non-discrimination
3. a country or territory with which the UK has a tax information exchange agreement (TIEA).
4. If the scheme is established in Guernsey and approved under section 157E of the Income Tax (Guernsey) Law 1975 it must also be closed to non-residents. The majority of existing QROPS will continue to qualify under one or more of these conditions.
• UK tax charges can apply to a payment by an overseas pension to an individual who has been resident outside the UK for less than 10 tax years. This refers to the extension of the current 5 year member payment provision period to 10 years, giving HMRC taxing rights over overseas pensions for 10 years after the member becomes non UK tax resident. This is to ensure that QROPS and other non UK pensions are being used in the way that they were intended. In particular this change is likely to have been brought in to help control individuals trying to use QROPS to facilitate flexible drawdown without paying UK tax, particularly in view if the withdrawal of the 70% rule. It is worth noting that this change will only apply to transfers which take place after 6 April 2017 giving a short term opportunity for clients to secure a 5 year member payment provision period.
• Currently QROPS are governed by the Pension Age Test and are not able to pay out benefits before the age of 55 unless in exceptional ill health. This rule is being relaxed slightly to bring it in line with UK registered pensions :
Authorised payments that can be made to a member aged under 55 are:
1. a serious ill-health lump sum
2. a short service refund lump sum
3. a refund of excess contribution lump
These latest announcements are further evidence of HMRC's intention to ensure that the QROPS rules are not abused. Greater clarification will give clients and their advisers certainty over the rules so that the regime can be used as intended for clients in appropriate circumstances. If you require any further information please do not hesitate to contact The QROPS Bureau.