Spring Budget 2017 - Update
In the recent UK Budget, a charge on transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) was announced by the chancellor, Phillip Hammond.
We have reviewed the guidance notes and draft legislation, and have summarised the key points below:
• Transfers to QROPS requested on or after the 9th March 2017 will now be subject to a 25% "overseas transfer 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. For example Australia.
3. There are three other exemptions listed but these relate mainly to transfers to overseas occupational type arrangements.
• The transfer charge can be reviewed if the member moves within 5 complete tax years of the date of transfer – the "relevant period". (I.e. if an EEA resident moves away from the EEA within 5 years of the transfer from the UK scheme, the transfer charge can still be applied. If a non EEA resident moves into the EEA within 5 years of the transfer from the UK scheme, the transfer charge can be reclaimed from HMRC).
• In addition, HMRC will retain taxing rights for 5 years from the date of transfer as well as for 10 years of non-UK residency (as from 6/4/17).
• There are increased reporting obligations on UK scheme managers transferring to QROPS and on QROPS scheme managers, who will have to confirm by the 13 April 2017 that they will comply with the new rules and wish to remain a QROPS.
The changes above will impact clients residing outside of the EEA who have not yet instructed a transfer to QROPS. Individuals that are planning to relocate to a non-EEA country within 5 years will also be impacted.
The QROPS Bureau anticipated that a transfer tax may be applied post Brexit, but not that it would be applied so soon. The tax on transfers approach is used in the US. HMRC would not have been able to apply to transfer charge to EEA residents, as this would not have been permitted under EU freedom of movement of capital regulations. There is also some logic in that EU countries have a similar level of income tax to the UK. HMRC want to ensure that UK tax relieved funds can be taxed somewhere.
The new transfer charge will reduce tax avoidance by expatriates in low income tax regimes, who could previously have transferred to QROPS tax free and had their pension income, including full flexible drawdown, paid gross and pay no or very little tax in their country of residence.
It is possible that a transfer tax will be applied to EEA transfers after Brexit and there is around a 2 year window of opportunity for EEA residents to transfer with a degree of certainty as to the tax treatment.
Other clients may require advice on how to consolidate their pensions if they have a number of different schemes and, in many cases, clients in low tax jurisdictions wishing to access full flexible drawdown may still be better off paying the transfer charge and receiving income gross from a QROPS.
QROPS will remain attractive and appropriate to clients in the correct circumstances but it is important to ensure that proper financial advice is taken, with input from an independent specialist where necessary.