One of the exceptions to the overseas transfer charge (OTC) is when the client is a European Economic Area (EEA) resident and the transfer is being made to an EEA-based Qrops.
One reason for this exception is likely to be that the UK’s HM Revenue & Customs would not be permitted to restrict European Union pension transfers under freedom of movement of capital rules. Another is that the levels of income tax in most EEA countries is broadly in line with the UK.
The OTC has been brought in to reduce tax avoidance. An individual with a UK pension would not move to Spain, for example, to save tax on their pension income. The transfer charge can be reviewed if the member moves within five complete tax years of the date of transfer – the ‘relevant period’.
For example, if an EEA resident moves away from the EEA within five years of the transfer from the UK scheme, the transfer charge can still be applied. If a non-EEA resident moves into the EEA within five years of the transfer from the UK scheme, the transfer charge can be reclaimed from HMRC.
In my view, this rule has been put in place to prevent, for example, somebody moving to an EEA country for a short period and then moving onto a non-EEA county in order to avoid the OTC.
This new rule means that increased care has to be taken when advising on transfers to Qrops and that the client’s ongoing plans need to be kept under review, as well as their circumstances and objectives as at the date of transfer.
If the main reason for HMRC exempting EEA residents from the OTC is because they are not permitted to under EU legislation, there is a danger that the application of the charge will be extended post Brexit, to include transfers in respect of EEA residents. If this is the case, there is a short-term window of opportunity of two years or so for EEA residents to transfer with some certainty as to the rules that will be applied.
See case studies 1 and 2 below:
Case study 1
Andrew is 64, has a UK deferred pension and retired to Italy in 2012. He has bought a property in Italy and does not intend to return to the UK to live or move anywhere else.
Andrew is likely to benefit from a transfer to Qrops in an EEA country, such as Malta in order to allow income to be paid gross at source and avoid tax on death after age 75. Andrew will not have to pay an overseas transfer charge.
Case study 2
Annabelle, 53, moved to live and work in Spain in 2015. She has a number of small deferred UK pension funds and is considering a transfer to Qrops. When her adviser reviews her plans, Annabelle tells her adviser that she is considering moving to Thailand when she retires in two years’ time.
Annabelle’s adviser warn her that, although she would not suffer the overseas transfer charge if she transfers to an EEA-based Qrops while a resident of Spain, the charge would be applied if she moved to Thailand within five years of the date of transfer. Annabelle’s adviser recommends that she consolidates her pension funds into a UK Sipp until her plans are clear.
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