Out-Law News 2 min. read

Spring Budget 2017: Tax charge on overseas pension transfers will deter scammers, says expert


The introduction of a 25% tax charge on pension transfers made to qualifying recognised overseas pension schemes (QROPS) will make a potential route for scammers less attractive, an expert has said.

The charge, announced at this week's Budget, will be "welcomed by those who have for some time suspected that certain overseas pension schemes are one of the current models of choice for pension scammers", said Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com.

"Bringing in a hefty tax charge should deter individuals from transferring unless they meet one of the residency criteria brought in – which, after all, do seem more geared towards what a QROPS is intended for," Fairhead said.

"However, the changes also bring in immediate need for those handling transfer requests to update processes and digest a considerable amount of guidance and draft legislation, effectively overnight. Administrators and QROPS providers will need to tread carefully to avoid tripping up with HMRC, which has not been averse to levying tax charges when transfers to purported QROPS go wrong," he said.

The 25% tax charge, which will be deducted before the transfer, will apply to pension transfers made to QROPS on or after 9 March 2017, subject to exemptions designed to allow tax free transfers "where people have a genuine need to transfer their pension".

These exemptions include where both the individual and the pension scheme are in countries within the European Economic Area (EEA); where both the individual and the pension scheme are in the same country outside the EEA; and where the QROPS is an occupational pension scheme provided by the individual's employer. An exemption will also apply to transfers to QROPS that are overseas public service pension schemes, where the individual is employed by one of the employers participating in the scheme.

Where one of the exemptions applies, and the individual's circumstances change within five tax years of the transfer taking place, the tax treatment of the transfer will be reconsidered. Similarly, UK tax will be refunded if the transfer was subject to tax and, within five years, one of the exemptions applies.

The government also intends to apply UK tax rules to payments from funds that have had UK tax relief but are then transferred to a QROPS on or after 6 April 2017. UK tax rules will apply to any payments made in the first five tax years following the transfer, regardless of whether the individual is or has been UK resident in that period.

The changes are "targeted at those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction", according to the Budget document. The government intends to legislate for the changes as part of the Finance Bill, which is due to be published on 20 March.

A QROPS is a foreign pension scheme that is recognised by HM Revenue and Customs (HMRC) as being capable of accepting a transfer value from a UK-registered pension scheme. Scheme members can transfer their UK pension benefits to a QROPS without incurring unauthorised payment charges or sanctions and, once transferred, escape UK tax liability on pension income.

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