Although some in the industry had predicted a move along these lines, no one appears to have expected it, adding to the impact of making yesterday’s surprise move by UK chancellor Phillip Hammond in his last Spring budget to tackle further the “abuse of foreign pension schemes”.
The new rules are clearly part of HM Revenue & Custom’s well established aim of reducing tax avoidance by ensuring that tax is paid on UK pension transfers, even if it is not in the UK.
As David White, partner of The Qrops Bureau, explains: “Since the introduction of flexible drawdown, HMRC is concerned that Qrops are making gross income payments to individuals who are resident in countries with a low or nil income tax regimes, resulting in the pension being withdrawn with no or very little tax being paid”.
He cites an example of a Malta Qrops making a flexible drawdown payment to a resident of the UAE where no income tax is payable, highlighting how jurisdictions and clients will be affected differently depending on different scenarios.
EEA ring fenced
This further clampdown on the international pensions market, impacts the European Economic Area (EEA) the least. The 25% tax charge does not apply upfront where the transfer is to a Qrops located in the EEA in combination with the client also being tax resident in an EEA member state.
Both Gibraltar and Malta are not caught so long as these EEA related conditions are met, as does a transfer to a New Zealand or an Australian Qrops where the client is a tax resident of New Zealand or Australia respectively.
“It is important under the new rules that the Qrops is located in the same country in which the member is tax-resident for those outside the EEA,” said Darion Pohl of Prism Xpat.
IoM hit
But as the Isle of Man is outside this area and not a member of the EU its Qrops will be hit with the overseas transfer charge.
However, there is overarching catch all part of the new ruling that means if a client’s circumstances change in relation to the exemptions within the first five tax years following the transfer the charge will apply at that point in time.
No consultation
The immediacy of these new requirements is understandably concerning many in the industry.
Old Mutual Wealth financial planning expect Rachael Griffin said: “It is disappointing that the government did not consult on these changes ahead of implementing them, as this will now result in confusion and concern for many advisers and clients who are currently going through the process”.
