In an earlier article, we wrote about the option for UK non-residents to transfer their UK-based pensions to a Qualified Recognized Overseas Pension Scheme (QROPS). QROPS were introduced in 2006 to allow for a tax-free transfer of UK-based pensions to another jurisdiction (sometimes an “offshore” jurisdiction) for non-UK-residents. This type of transfer often offers significant tax planning benefits.
The flexibility afforded by a QROPS in some cases prompted certain QROPS providers to extend beyond the original intentions of HM Revenue and Customs (HMRC). In fact, HMRC believes that some QROPS providers have abused QROPS legislation and while a QROP may legitimately offer tax benefits (depending on where the QROPS is located and where the beneficiary is a tax resident), they are certainly not intended to be tax avoidance vehicles.
HMRC point out that QROPS are meant to provide an income in retirement for beneficiaries. For example, when QROPS providers give members the option to withdraw significant — if not all — funds in a QROPS, HMRC perceives this option to be an abuse. And in turn, HMRC has announced draft legislation changes to QROPS through their ‘The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012’ document. “Guernsey is the principal target of anti-avoidance legislation to be enacted by the UK next April, ostensibly to prevent abuse of a scheme designed to allow British expatriates to move their pension funds abroad.”
The draft legislation can make QROP schemes potentially far less attractive for anyone wanting to move their pension abroad from April 6th, 2012 onwards. David Erhard, managing director of STM Fidecs is not surprised. “QROPS providers have been promoting QROPS as legitimate tax avoidance vehicle and assisting retirees to access their entire pensions as a lump sum. This was never intended and is contrary to the spirit of a pension scheme.”
The three more significant proposed changes are:
1. Those transferring their pensions to a QROPS will be required to sign an acknowledgment that they understand they may be subject to tax charges if QROPS rules are breached. HMRC wants those considering a transfer to a QROPS to take the best advice and work with reputable brokerages only.
2. QROPS providers are currently required to report all payments made from pension funds to HMRC for the first five years after a member becomes a UK-non-resident. HMRC is now proposing to require providers to report to HMRC for 10 years from the date the pension is transferred overseas. This is HMRC’s attempt to mitigate the abusive practices of certain providers.
3. HMRC is proposing that a member (beneficiary) of a QROPS be taxed as if they were a resident of the country in which the QROPS is located. This will ensure that if the member is a resident of a country other than the country in which the QROPS is held, he/she will not be able to receive more tax relief than members resident in the nation where the QROPS is held.
Some have interpreted the last point as a direct hit to QROPS providers in Guernsey. That is because Guernsey (as well as some other jurisdictions) does not tax pension income paid to non-resident members from a QROPS held in Guernsey. But Guernsey does tax local residents 20% on pension income. To adjust, Guernsey will either have to charge non-resident QROPS holders 20% for all pension withdrawals or not tax withdrawals from pensions for local residents. The problem is if Guernsey chooses the former approach, a recipient of pension payments may be double taxed. If the recipient’s country of residence does not have a tax treaty with Guernsey that is exactly what could happen.
As always the case, the QROPS providers that have maintained the spirit of a pension scheme will also have to bear the consequences of changes. In some cases that could mean that the benefits of a QROPS will be reduced and/or the options of QROPS jurisdictions will be narrowed. If the proposals are passed into law in their current form, it will be even more important to seek out a recognized QROPS provider who has not only stuck to the rules, but has also abided by the spirit of the rules.