The 31 January 2020 saw the UK officially leave the European Union and enter a transition period, during which it will seek to extricate itself from, what was effectively, a 47-year marriage.
Given the current interconnectedness of the legal and regulatory systems – it will be no mean feat.
The biggest risk for the advice sector is the uncertainty that brings.
Qrops
It is reasonable to state that advisers were somewhat surprised by then-chancellor Philip Hammond’s decision to impose a 25% overseas transfer charge (OTC) on qualifying recognised overseas pensions schemes in 2017.
It meant that transfers to third countries outside of the European Economic Area (EEA), in which the recipient did not live for at least five years, were subject to a 25% charge.
David White, managing director of QB Partners, told International Adviser: “As from last Friday, UK residents were not EEA residents, so unless HM Revenue & Customs changes the rules, an OTC would apply.”
It was imperative that HMRC act quickly to clarify this, “as UK pension scheme administrators would need to know what they were required to do”, he added.
The issue also extends to Gibraltar, which only had EEA status through the UK.
HMRC update
Fortunately, this issue was resolved relatively quickly.
On 3 February, the UK taxman updated its Pensions Tax Manual, which lists five exemptions to the OTC.
The second exemption, which previously only referenced EEA residents, now states that the charge is not applicable if:
- The Qrops receiving the transfer is established in Gibraltar or a country within the EEA and the member is UK resident or resident in a country within the EEA or Gibraltar.
White added: “This is what we would have expected, at least for the transition period.
“The original EEA exemption was there because of EU freedom of movement of capital regulations.
“HMRC was not able to restrict EEA residents from transferring to an EU pension by applying a penal tax charge.”
He continued: “Under the transitional arrangements, all agreements between the EU and the UK continue. It was logical that the OTC rules would be changed to reflect this, but it had to be done at policy level by HMRC.”
Bumpy road ahead?
It is a good news story that HMRC amended its exclusion criteria on the first working day after the UK left the EU.
But it does raise a number of troubling questions about the small details that will need to be clarified during the course of 2020, as prime minister Boris Johnson has set an ambitious target to end the transition period before 2021.
While some changes may be of paramount importance to financial advisers and wealth managers, there is no guarantee that they will be prioritised by the big institutions like HMRC and HM Treasury.
The priority for financial advisers is to ensure that clients are not adversely impacted by unclear rules and regulation.
The best course of action may be keeping HMRC’s hotline number on speed dial.
Alternatively, advisers can reach out to relevant technical experts operating across the UK and the crown dependencies.
