Transfer to or from QROPS: UK tax implications

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SRC-Time’s Tax Manager Richard Wernick recently had the following article published by the prestigious International Tax Planning Association

A Qualifying Recognised Overseas Pension Scheme (QROPS) can be appropriate for a UK taxpayer, if they have built up a UK pension fund, but intend to retire outside the UK.

However, a transfer to a QROPS is a benefit crystallisation event (BCE8 in the legislation) and will be tested against the available Lifetime Allowance for pensions savings.  This is £1,073,100 (2020-2021). I look at the practicalities of this further below.

To retain QROPS status, and within certain timescales, a QROPS must undertake to report any subsequent benefit crystallisations (or further transfers) to the UK taxation agency – HM Revenue & Customs (HMRC), HMRC will consider if the payments fall within UK member payment provisions and may take action against what they see as abuses of the system.

Certain transfers to QROPS are subject to a 25% overseas transfer charge. I examine this in detail below.

What is a QROPS?

A Qualifying Recognised Overseas Pension Scheme (QROPS) is a recognised overseas pension scheme which has provided information and evidence to HMRC that:

· the scheme satisfies all the requirements as described for a recognised overseas scheme, and

· has undertaken to notify the HMRC if the scheme ceases to be a recognised overseas scheme and supply them with information when making certain payments.

The scheme must not have been excluded from being a QROPS. Exclusion may happen if the scheme fails to comply with any of the HMRC requirements.

HMRC is required to publish a list of ROP schemes. This list is published twice a month and should be checked before payment is made to an overseas scheme. A scheme’s name will be deleted from the list as a matter of urgency if it ceases to be a ROPS. Due to HMRC confidentiality rules the list does not include those schemes which have not consented to being listed.

It should be noted that although a scheme may be recognised as a QROPS, local tax laws may not permit a transfer in. Therefore, I always suggest taking local advice from a suitable qualified professional.

What is a benefit crystallisation event (BCE8)?

There is a list of BCEs and transfer to a QROPS is 8th on the list.  The transfer produces a crystallised amount which has to be tested against the available lifetime allowance. This test is generally carried out by the scheme administrator or scheme trustees.

The lifetime allowance is not a limit; benefits above the lifetime allowance can be paid out but the excess will be subject to a lifetime allowance charge.

Example

Wojtek has a personal pension with a fund value of £485,000. He has no other pension arrangements. In May 2019, he decided to close his plumbing business and retire to Malta. A total of £485,000 is tested against the 2019/20 lifetime allowance of £1,055,000. No lifetime allowance charge is due because the amount crystallised is less than the lifetime allowance.

If Wojtek’s fund was £1,200,000, a lifetime allowance charge would be due (£1,200,00-£1,055,000) £145,000. The rate of tax is 25% and so £36,250 would be due. 

What is the overseas transfer charge?

Since March 2017, most transfers to a QROPS are subject to a 25% overseas transfer charge.

As detailed above, currently when a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS) their pension funds are tested against the available Lifetime Allowance (BCE8) and an LTA charge of 25% is applied on any excess, if the transfer value is below the available LTA then there would be no excess tax charge; this process remains.

However, in addition to any LTA charge, the whole (post BCE 8) transfer value of certain transfers to QROPS, may be subject to an additional 25% overseas transfer charge.

The overseas transfer charge will apply unless at least one of the following applies:

· both the individual and the QROPS are in the same country after the transfer

· the QROPS is in a country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein, in the context of this Gibraltar is considered part of the EU as part of the UK) and the individual is resident in another EEA after the transfer

· the QROPS is an occupational pension scheme sponsored by the individual’s employer

· the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme

· the QROPS is a pension scheme established by a listed international organisation

If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.

UK tax will be refunded if the individual made a taxable transfer and within five tax years a change of circumstances means that one of the exemptions applies to the transfer.

The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC).

Example

Karen is 58 years old and has £750,000 of available LTA. In July 2020 she decided to move her pension from a UK registered pension scheme to a QROPS in Malta. The scheme advised her that her pension is valued at £850,000. Because Karen is moving to Dubai, her circumstances are such that the overseas transfer charge applies

The BCE8 and overseas transfer charge implications are as follows:

– BCE 8 amount (scheme funds being transferred) = £850,000

– LTA excess: £850,000-£750,000 = £100,000

– Amount of LTA charge: £100,000 @25% = £25,000

– Amount to be transferred to QROPS is therefore £850,000-£25,000= £825,000

– Overseas transfer change: £825,000 @ 25% = £206,250

– Amount received by Karen’s QROPS is therefore – £618,750

Summary

The QROPs regime has a lot of traps for the unwary, not just the tax implications, but also unregulated and unscrupulous salespeople.  Hence, taking advice from a UK IFA as well as getting tax advice is critical to protect a pension nest-egg.

SRC-Time are one of the South East’s leading accountancy firms in advising companies, the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issues raised above. 

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk  or speak with an account manager to get any process started. 


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