Repayment of Overseas Transfer Charge Regulations
These regulations, which come into effect on 25 April 2019 have been issued by HMRC to give guidance on how to reclaim the Overseas Transfer Charge (OTC) if circumstances have changed, or if the charge was made in error.
The Overseas Transfer Charge (OTC) is a 25% charge on transferring to QROPS and following its introduction in 2017, it has reduced the number of people who have transferred to QROPS significantly, particularly in respect of those people who are resident outside of the EEA.
HMRC statistics on the numbers of pension transfers show that the number of QROPS transfers in the year immediately following the introduction of the OTC more than halved. Although the average transfer size has increased significantly, the number of pension transfers in 2017 to 2018 was the lowest since the first year that QROPS were introduced.
There are further details of the changes in numbers of people transferring below, which may add some additional context.
The Repayment of Overseas Transfer Charge Regulations are quite focused on pension schemes reclaiming the charge, rather than members. As the original charge will have been deducted from the transfer by the transferring scheme administrator, HMRC may not be able to repay the charge directly to the scheme member. Instead the charge will have to be repaid to either 1, the scheme who deducted it in the first place or 2, an alternative registered pension scheme or 3, to the QROPS to which the member has transferred, or 4, to a new QROPS which meets the OTC exemption.
Those people impacted by the Repayment of Overseas Transfer Charge Regulations are likely to have failed one of the exemptions on the original transfer to QROPS (and therefore paid the OTC) and had a change in circumstances within 5 tax years of the date of transfer e.g.
An individual who moved to a country outside the EEA but has now moved to a country within the EEA, within 5 tax years of the charge being applied.
An individual moves to a country outside of the EEA and transfers to a QROPS and then moves again to a country which has a local QROPS and transfers his/her benefits to that QROPS e.g. Australia.
HMRC have said that the guidance has also been issued for those people for whom the OTC was deducted in error, although we would expect this to be minimal.
We believe that the number of people who paid the OTC is lower than HMRC anticipated as those people who did not meet the OTC exemption will, on the whole, not have transferred to QROPS. Therefore, we believe that the number of people impacted by this guidance will be minimal.
As per sections 3 (f) and (g) of SI 2019 no 123, people who have transferred to QROPS and incurred the OTC will need to be aware of any change in their circumstances which leads to them meeting an exemptions and the timescale that they must meet if they wish to reclaim the OTC.
Ongoing financial advice would help with this.
HMRC have made the point in the guidelines that this clarification is not related to Brexit. It will be interesting to see whether any further changes to the OTC rules are made following Brexit
Detail of Numbers of Transfers
As expected, the introduction of the OTC in March 2017 had an impact on the number of people transferring to QROPS.
The figures show that the number of QROPS transfers in the year immediately following more than halved.
Up until the introduction of the OTC, the number of transfers and amounts had been fluctuating and were impacted by changes in pensions legislation, in both April 2012 and April 2015. Which included increases in QROPS reporting requirements and the QROPS Pension Age Test, along with the introduction of pension freedoms.
Although the average transfer size has increased significantly, the number of pension transfers in 2017 to 2018 was the lowest since the first year that QROPS were introduced.