As reported earlier, the Treasury announced today that QROPS tax abuse was to be legislated against but gave no detail – prompting anguished speculation and concern among bewildered QROPS providers, who feared the rug was about to be somehow pulled from under them.
However, an HMRC statement released in the past hour has clarified the matter, not to mention calmed the nerves of those involved in the QROPS sector.
HMRC said the government was to bring forward a new clause in the Finance Bill that will "prevent tax avoidance through the interaction of relief for pension savings and the provisions of certain double taxation arrangement (sic)."
This relates to a clause in the new double taxation agreement with Hong Kong that would have allowed UK resident tax-payers with Hong Kong domiciled QROPS and pensions to receive their income at a top rate of 15% and to receive lump sum payments tax free.
The wording of the treaty is as follows: “Pensions and other similar remuneration (including a lump sum payment) arising in a Contracting Party and paid to a resident of the other Contracting Party in consideration of past employment or self-employment and social security payments shall be taxed only in the first-mentioned Party.”
This would have meant that any pension income arising from a Hong Kong pension would not be taxed in the UK, but in Hong Kong, where the top rate of tax is 15% and lump sum payments are tax-free.
At least one Hong Kong-based law firm was known to have been promoting this angle in the international QROPS market.
However, this has come to the UK’s attention and the "loophole" has now been closed.
HMRC said today that a payment of a pension or similar arrangement would be taxed in the UK under the following circumstances:
• where the payment arises in the other territory;
• where it is received by an individual resident of the United Kingdom;
• where the pension savings in respect of which the pension or other similar remuneration is paid have been transferred to a pension scheme in the other territory; and
• where the main purpose or one of the main purposes of any person concerned with the transfer of pension savings in respect of which the payment is made was to take advantage of the double taxation arrangement in respect of that payment by means of that transfer.
The statement added: "In the event that tax is paid in the other jurisdiction, appropriate credit will be available against the UK tax chargeable."