Transfer to or from qualifying recognised overseas pension schemes
Discover the main considerations when transferring a pension to or from a Qualifying Recognised Overseas Pension Scheme and recent rule changes.
- A Qualifying Recognised Overseas Pension Scheme (QROPS) can be appropriate for an individual who has built up a UK pension fund, but intends to retire outside the UK.
- A transfer to a QROPS is a benefit crystallisation event (BCE8) and will be tested against available Lifetime Allowance
- To retain QROPS status, and within certain timescales, a QROPS must undertake to report any subsequent benefit crystallisations (or further transfers) to HMRC. HMRC will consider if the payments fall within UK member payment provisions and may take action against what they see as abuses of the system.
- Certain transfers to QROPS, requested on or after 9 March 2017, are subject to a 25% overseas transfer charge.
What is a QROPS?
A Qualifying Recognised Overseas Pension Scheme (QROPS) is a recognised overseas pension scheme which has provided information and evidence to HMRC that:
- the scheme satisfies all the requirements as described for a recognised overseas scheme, and
- has undertaken to notify the HMRC if the scheme ceases to be a recognised overseas scheme and supply them with information when making certain payments.
The scheme must not have been excluded from being a QROPS. Exclusion may happen if the scheme fails to comply with any of the HMRC requirements. If this happens the HMRC must inform the scheme manager within 30 days. There is an option to appeal this decision.
HMRC has published a list of ROP schemes. This list is published twice a month and should be checked before payment is made to an overseas scheme. A scheme's name will be deleted from the list as a matter of urgency if it ceases to be a ROPS. Due to HMRC confidentiality rules the list does not include those schemes which have not consented to being listed.
It should be noted that although a scheme may be recognised as a QROPS, local tax laws may not permit a transfer in.
A transfer out to a QROPS is a benefit crystallisation event (BCE8) so any transfer value in excess of the available LTA will be subject to a 25% tax charge. Find out more in our Lifetime Allowance article.
Read more about QROPS in the HMRC’s Pensions Tax Manual.
Impact on Lifetime Allowance of transferring in a QROPS
If a transfer payment is from a Recognised Overseas Pension Scheme (ROPS) or a Qualifying Recognised Overseas Pension Scheme (QROPS) the member can apply to HMRC for an enhanced Lifetime Allowance (LTA). The member must claim this enhancement no later than 5 years after 31 January following the tax year in which the transfer payment was made. It is the member's responsibility to ensure that he/she applies for the appropriate LTA enhancement. When an overseas transfer is received the scheme will normally write to the customer pointing out:
- they may be able to apply for an enhanced LTA if the transferring scheme was a ROPS or a QROPS
- the transferring scheme should be able to confirm if they are a ROPS or QROPS.
- they should speak to HMRC and/or a financial adviser about this.
Finance Act 2004 Sections 188(5) and 224-226
Autumn Statement –amendment to QROPS rules
In the Autumn Statement of 2016 the government announced major plans to prevent QROPS from being misused to provide a more favourable tax position for those who do not intend to leave the UK on a long term basis.
Previously only 90% of the income from a QROPS was currently subject to income tax for a UK resident. Now 100% of the income is liable to UK tax (as with UK pensions income) and this, with other changes, reduces the potential tax advantages of UK residents transferring to, or investing in QROPS.
A QROPS must tell HMRC when they make a ‘payment’ in respect of a member who has a ‘relevant transfer fund’. Payments include not just pension and lump sum payments but also any transfer out of the scheme. A relevant transfer fund is created when a member transfers in sums and assets from either:
- a UK registered pension scheme, or
- another overseas pension scheme that is a relevant non-UK scheme.
On receipt of this information HMRC will consider if the payments fall within UK member payment provisions and may take action against what they see as abuses of the system.
The QROPS needs to report any ‘payments’ (see above) to HMRC unless both the following conditions are met:
- The payment is made more than 10 years after the day of the transfer that created the ‘relevant transfer fund’, and
- The member is neither UK resident when the payment is made, nor in any of the previous 10 tax years. A UK tax year runs from 6 April to the following 5 April.
One of the other loopholes which was removed in the Finance Act 2017 was that of “section 615 schemes”. A section 615 scheme was a scheme which was established by a UK employer for employees working overseas and it received special tax treatment. If these schemes closed to new contributions on 6 April 2017 then the special tax treatment remained but if they didn’t then they became Employer Financed Retirement Benefit Schemes (EFRBS).
Finance Act 2004 section 244
HMRC Pension Tax Manual PTM102000
Overseas transfer charge
This change was announced by the Chancellor in the Spring Budget 2017. Certain transfers to QROPS, requested on or after 9 March 2017, are subject to a 25% overseas transfer charge.
So what does this mean?
As detailed above, currently when a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS) their pension funds are tested against the available Lifetime Allowance (BCE8) and an LTA charge of 25% is applied on any excess, if the transfer value is below the available LTA then there would be no excess tax charge; this process remains.
However, in addition to any LTA charge, the whole (post BCE 8) transfer value of certain transfers to QROPS, requested on or after 9 March 2017, will be subject to an additional 25% overseas transfer charge.
The overseas transfer charge will apply unless at least one of the following applies:
- both the individual and the QROPS are in the same country after the transfer
- the QROPS is in a country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein, in the context of this Gibraltar is considered part of the EU as part of the UK) and the individual is resident in another EEA after the transfer
- the QROPS is an occupational pension scheme sponsored by the individual’s employer
- the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
- the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation. More guidance on this is given in PTM 112200 as this does not simply mean a multi-national employer).
Finance Act 2004 section 244l
If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.
UK tax will be refunded if the individual made a taxable transfer and within five tax years a change of circumstances means that one of the exemptions applies to the transfer.
The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC).
Scheme managers of existing QROPS needed to decide whether or not they wished their scheme to continue to be a QROPS following the introduction of the overseas transfer charge. If they wished to continue they had to make an extra undertaking to HMRC to operate the overseas transfer charge by the 13 April 2017. If HMRC did not receive the revised undertaking the scheme will have ceased being a QROPS on 14 April 2017. There is no right of appeal if a scheme stopped being a QROPS in these circumstances. Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for ten tax years after the date of transfer, regardless of where the individual is resident.
HMRC will provide guidance setting out how the new tax charge will work and the new obligations.
Barrie is 58 years old and has £750,000 of available LTA. In July 2017 he decides to move his pension from a UK registered pension scheme to a QROPS. The scheme advise him his pension is valued at £850,000. Barrie’s circumstances are such that the overseas transfer charge applies
The process of calculating the amount of BCE8 and overseas transfer charge is as follows:
Establish the potential BCE 8 (scheme funds being transferred) = £850,000
Establish amount of any LTA excess: £850,000-£750,000 = £100,000
Establish amount of LTA charge: £100,000 @25% = £25,000
Amount to be transferred to QROPS is therefore £850,000-£25,000= £825,000
Establish overseas transfer change: £825,000 @ 25% = £206,250
Amount received by the QROPS is therefore - £618,750
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