For the unwary adviser and his or her American client, Freedman warns, such qualifying recognised overseas pension schemes represent a significant potential “trap”.
“QROPS are fine for a British citizen who is moving to the States permanently, but hasn’t moved yet,” he said. “But they’re no good for Americans.”
Freedman said he decided to speak out after a couple came to him recently, after having been hit with a tax equivalent to 25% of their total pension of around £1.28m, when their previous adviser recommended they transfer into a QROPS in 2011.
“In this case, the move triggered US tax charges on the whole value of [the] transfer,” Freedman said.
For a start, the QROPS was registered in a jurisdiction that lacked a double taxation agreement with the US. This meant that the scheme was subject to the need to report annually to the US tax authorities on its underlying growth. For each year not reported, interest and tax penalties ultimately would be assessed.
“The client was unaware of the tax charges until a few years later, which resulted in further tax penalties for not reporting the transaction,” Freedman said.
Even if the QROP scheme they choose meets certain US issues, for example, by being domiciled in Malta, the transfer of an American’s UK pension into a QROPS could end up being a taxable event, unless the client has built up enough foreign tax credits to offset it, Freedman noted.
On top of that, the US authorities view QROPS as a form of trust, which therefore also necessitates “annual foreign trust reporting”.
Failure to comply with this reporting requirement alone “can result in tax penalties up to 50% of the account value”, Freedman said.
“For many individuals, QROPS are an excellent, legally-tax-efficient way to make the most of an individual’s pension savings,” Freedman said.
“But there is a tendency to see them as a one-size-fits-all product for every client who is moving overseas for good, regardless of their nationality, or final destination. This is where the problems are arising.”
Founded in London in 1986, London & Capital specialises on cross-border financial advice. In addition to its London headquarters, it has an office in Hong Kong, and is regulated by the UK’s Financial Conduct Authority, US Securities & Exchange Commission and the Hong Kong Securities & Futures Commission. Around one-third of its business currently involves looking after Americans or those with American tax and related issues.
