These sit alongside the proposals contained in the 2016 autumn statement on the tax treatment of overseas pension schemes.
The most radical proposal was the introduction of a transfer tax of 25% of the transfer value, where a UK pension fund is transferred to a Qrops on or after 9 March 2017, unless it meets one of a series of criteria for exemption.
The charge is levied on the net transfer value, after deduction of any lifetime allowance charge (where relevant). The conditions for exemption are:
- both the member and the Qrops are resident in the same country after the transfer;
- the Qrops is in one country in the European Economic Area (EEA) (an EU member state, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer (the draft HM Revenue & Customs guidance states it will treat Gibraltar as an EEA member state for the purposes of this exemption);
- the Qrops is an occupational pension scheme sponsored by the employer;
- the Qrops is an overseas public service pension scheme and the individual is working for one of the employers participating in the scheme; and
- the Qrops is a pension scheme established by an international organisation in order to provide benefits in respect of past service and the individual is employed by that international organisation.
If a transfer meets one of the exemption criteria, and there is a change in circumstances, either because the member takes up residence in another country or the fund is transferred to another Qrops, within five full tax years of the transfer so that the exemptions would not have applied, the transfer tax can become due at that time.
Conversely, if a transfer charge was levied and a change in circumstances occurs within five tax years of the transfer so that the exemption criteria are met, the charge will be refunded. See boxout on page 36 for examples of how these rules will operate.
The proposal to introduce a transfer charge effectively means that so-called ‘third country’ transfers are no longer viable, unless the transfer is to a bona fide employer-sponsored scheme.
The potential tax charge on a change in circumstances is particularly harsh, as five years is a long time frame in which unforeseen circumstances could arise that cause an expat to move to another country.
The transfer tax rules apply to any transfer made on or after 9 March 2017. There is an element of transitional protection for transfers that had already been initiated before this date.
The UK finance bill 2017 and a set of amending regulations also contain proposals to change the UK taxation of overseas pension schemes, but with an effective date set for
6 April 2017.
The amending regulations contain three changes to the registered overseas pension scheme (Rops) qualifying criteria. A scheme must be a Rops in order to be able to accept a transfer from a UK pension fund.
The first, and most widely reported, change is the removal of the so-called ‘70/30’ rule. It requires certain schemes to have a provision in their rules to restrict access in the form of a lump sum to a maximum of 30% in respect of any relevant transfer fund, ie one that has arisen from a transfer from a UK scheme. The remaining 70% must be retained in the scheme and used to provide a pension income.
When pension flexibility was introduced in 2015, the 70/30 rule was also removed for certain overseas schemes, primarily for those that were resident in an EEA country, or in a country (except New Zealand) that has a fully comprehensive double tax treaty with the UK.
This meant that, for example, Maltese schemes could offer pension flexibility but Isle of Man and Gibraltar schemes could not (Gibraltar has been treated non-EEA for the purposes of this test).
The amending regulations now remove the 70/30 rule for all schemes, no matter where they are based.