New QROPS rules from April

by David Franks [email protected]

David Franks is an accomplished and experienced practitioner in both UK and overseas taxation. He lectures widely on taxation issues, in particular in relation to investment planning. David holds the Investment Management Certificate and is the Chief Executive and Finance Director of the Blevins Franks Group.

Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in April 2006 on the back of EU directives on pension harmonisation.

The intention was to enable British expatriates to simplify their affairs by taking their pension savings with them by transferring to a new scheme in their new country of residence.

QROPS offer various benefits and since 2006 there has been a huge increase in the number of people transferring to QROPS.  

On December 6, 2011 HM Revenue & Customs (HMRC) said it had found increasing evidence that the system is being undermined and announced new draft regulations for QROPS.

The problem is that some have seen QROPS as an opportunity for members to take their whole pension fund as cash, a practice known as ‘pension busting’, or to avoid paying tax on what should be taxable income – in some cases a combination of both.

While taking 100% cash is technically possible under the current rules once the member has been non-UK resident for five tax years, this goes against the spirit of QROPS legislation.

We always thought that when this abuse became known HMRC would take action.

While pension busting has technically speaking been legal, not declaring payments from a pension scheme in your country of residence is in most cases strictly illegal.  

We thought there was risk that HMRC may take similar action it did with Singapore and disqualify the abusive schemes, so the fact that the new proposals are to general QROPS legislation was a bit unexpected.

That said, the draft legislation does single out New Zealand QROPS for allowing members to take more than 30% of their fund as cash.  

The proposed legislation tackles three main issues.  

(1) The lump sum – No more than 30% of a fund may be taken as a lump sum, even after the reporting period has finished.  It states that “pension schemes established in New Zealand have been used to allow individuals to take their pension savings as a lump sum.  Regulations 4 to 6 amend the conditions so that 70% of the funds transferred to certain pension schemes in New Zealand have to be used to provide an income in retirement.”  (The exception is to the Kiwisaver scheme only available to New Zealand residents.)

(2) Avoiding paying tax on pension income – Many QROPS jurisdictions only apply tax on QROPS income received by local residents and non-residents are exempt. The same rule must now apply to everyone. We think HMRC is effectively trying to force jurisdictions to apply local tax to non-residents. A non-resident would be able to claim back the tax if there is a double tax treaty, but HMRC will be satisfied the pension income is being taxed somewhere.  

(3) The reporting period – This is being extended to the later of five tax years after a member has become non-UK resident and ten years after the transfer to QROPS was made.  

HMRC says that the changes “are intended to make the QROPS regime operate in line with the policy intention”.  Although they are still proposals, we have to presume they have been well thought out.  A consultation period began on December 6, 2011 and was scheduled to end on January 31, 2012.  The new legislation will come into effect on April 6, 2012.

Does the start date of April 6 provide a limited window of opportunity to take action on your pension? While it is still technically possible to take your entire pension as cash if the jurisdiction allows it before 6th April, you have to consider whether this is still fundamentally abusing the spirit of the HMRC regulations.

If HRMC realise that they have left the back door open for abuse, they can back date the legislation to apply from the date it was announced.

It would apply from December 6, 2011 rather than April 6, 2012.  This is what it did with its revised legislation on ‘disguised remuneration’ in 2010, so there is already a precedent for this.

It is very important that you have all the facts and you weigh all the factors before making a decision to take more than 30% of your fund as cash.

You could potentially face an unauthorised tax charge of 55% or be locked into an unfavourable scheme, not withstanding the potential for an additional tax charge in the country in which you are resident.

For those expatriates who use QROPS as a means of compliant and effective tax planning in their country of residence and/or to lower currency risk (QROPS can be invested and the income received in Euros or any major currency), they are an attractive option both pre and post April 6.

Provided you use the QROPS rules in the spirit they were intended, for the vast majority QROPS remain as attractive as they previously were.

To get all the facts on QROPS and the new legislation, and advice on your situation, consult an adviser who is authorised and regulated by the UK Financial Services Authority.

Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.  

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.

To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranks.com.

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