What type of QROPS tax should we expect post-Brexit? An important part of working in the financial industry is predicting future changes to legislation that will affect clients. Sometimes we have clear deadlines to beat; other times, it’s more a question of being prepared with contingency plans just in case.
QROPS tax rumours
The rumour-mill of government, where leaks, briefings, and lobbying is rife, creates fertile ground for those who seek to influence policy, control media output, or gauge public opinion.
Rumours can be particularly consequential. As Mark Twain once quipped – “The report of my death has been grossly exaggerated”.
The Overseas Transfer Charge (OTC) is one form of QROPS tax that has been a topic of considerable debate and rumour over the past year due to the UK leaving the EU. The OTC applies to overseas pension transfers that don’t qualify for any of the three exemptions below:
- When the transfer is going to an EU/EEA country
- Where the individual lives in the same country as the overseas scheme
- Where the UK pension is being transferred to an ‘Occupational scheme.’
The first exemption has caused the most concern for UK pension holders who live in an EU country and are considering taking advantage of transferring to a QROPS. Many haven’t completed their move due to Covid restrictions, and the final Brexit date has now passed.
One of the most valuable benefits of transferring to a QROPS is avoiding the Lifetime Allowance charge, applicable to total UK pension fund values of £1,073,100.
QROPS also enable individuals who have moved permanently to organise their pension investments in a way that more accurately reflects lifestyle, currency, and investment requirements. In the case of Malta, income and lump sum withdrawals can be paid to any bank account gross of tax.
Why did HMRC apply this QROPS tax charge in the first place? Before implementation, overseas transfers were allowable to a long list of countries around the world. As the industry developed, it was soon apparent that in some cases, the main reason for transferring was to avoid pension taxation completely. For example, a UK pension could be transferred to an offshore location and avoid all QROPS tax on income and lump sum withdrawals in that country. Many people took advantage of this loophole by withdrawing their whole fund on completion of the transfer.
Similarly, those who lived in nil-tax countries could also break their pension without local or UK tax imposition.
This was deemed unfair by the UK Treasury, as significant tax allowances were granted as the pension accumulated. Pensions qualify for tax relief on input and benefit from tax-free roll-up. The other side of the coin is that they are fully taxable on retirement (albeit at reduced rates). The consequences of the review included removing various schemes and countries from the allowable transfer list.
QROPS tax and and DTTs
Taxation on retirement is always an important consideration for anyone who becomes resident outside of the UK. The answers to cross-border questions are normally covered by a mix of local legislation and Dual Tax Treaties (DTTs).
DTTs are a particularly important element of the OTC debate. All European countries have DTTs between each other. This means retirement income is guaranteed to be taxed in the country where the individual resides, hence the EU/EEA exemption. DTTs are designed to equalise taxation between countries to ensure no one pays tax twice on the same income or asset; in a perfect world, things should balance out between individual nations.
The indications are that the EU/EEA exemption will continue into the post-Brexit world; however, we can’t say for certain at this point.
The UK and EU are still negotiating the treaty for Financial Services. It’s difficult to assess how long it will take and what will be in it? Until we know otherwise, therefore, EU transfers still qualify for the OTC exemption.
The OTC is a hefty 25% of transferred funds. Anyone either in the process of transfer or considering their position should ensure that the ceding scheme won’t transfer funds if the QROPS tax exemption is removed.
What we all need in this environment are facts. Like the fictional character, Mr. Gradgrind said in the first line of Dickens’ novel Hard Times, “You can only form the mind of reasoning animals upon Facts: nothing else will ever be of any service to them.”
So, more Gradgrind and less Twain, please!
If you would like to know more about different QROPS tax, please download our free guide.