The Overseas Transfer Charge

In our recent article detailing the outcomes of the Spring 2017 Budget, we highlighted that Transfers of Qualifying Recognised Overseas Pension Schemes, or QROPS, will now be subject to a new 25% tax, restricting penalty-free movement of tax-relieved UK pension funds overseas strictly to the standard circumstances envisaged.

The introduction of the tax on QROPS transfers came as somewhat of a shock. However, given the government’s previous statements confirming their intended use of QROPS, it’s fair to say that the government has actually changed the focus of QROPS transfers to that which was originally intended – individuals leaving the UK permanently and taking their pension savings with them.

The new overseas transfer charge of 25% will apply to transfers from a UK registered pension scheme to QROPS or QROPS to QROPS transfers requested (a substantive request to transfer to X not just a casual enquiry) on or after 9th March 2017.

The overseas transfer charge will not apply if:

• The QROPS and the individual are resident in the same country
• The individual and the QROPS are both resident within the EEA/EU (not necessarily in the same country)*
• The QROPS is an occupational pension scheme and the individual is an employee of a sponsoring employer under the scheme
• the QROPS is an overseas public service scheme and the individual is employed by an employer that participates in that scheme
• the QROPS is a pension scheme of an international organisation and the individual is employed by that international organisation

How the overseas transfer charge works

The transfer payment made to a QROPS is still a Benefit Crystallisation Event No 8 (BCE8). This has the function of testing the transfer against the standard lifetime allowance or the individual’s higher lifetime allowance if, for example, they have elected for transitional protection. The BCE8 will subject the excess over the lifetime allowance to a lifetime allowance excess charge of 25%.

The overseas transfer charge of 25% is then applied to the residual fund.

Example

• Fred successfully elected for Fixed Protection 2014 so has a lifetime allowance of £1.5m.
• He has a pension fund valued at £1.7m.
• He is UK resident but wants to transfer his fund to a QROPS in the Isle of Man which is not within the EEA/EU.
• The BCE 8 means £200,000 over the lifetime allowance will be subject to a tax charge of £50,000.
• The overseas transfer charge will be made on £1.65m @25% = £412,500. Funds to transfer £1,237,500.
• Total tax charge to transfer is £462,500

*Countries within the EEA/EU (including Gibraltar)

EEA: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK

EU: Norway, Lichtenstein, Iceland.

If the charge applies, the scheme administrator and individual are jointly and severally liable.

The transfer charge applies to all pension rights including pension credit rights, beneficiary’s scheme pension/drawdown/flexi-access drawdown which will include nominees and successor’s rights. Although these funds do not suffer a BCE8 test, if the overseas transfer charge applies, a flat rate charge of 25% will be deducted from these funds on transfer.

There is also now a 5 year rule – this means that although the overseas transfer charge may not have been due on the original transfer, any change – for example change of residence – means that the charge becomes due for up to 5 full tax years (known as the relevant period) after the date of transfer. In addition, should an exemption apply within the five full tax years following the transfer, a refund of the charge can be made.

All QROPS scheme managers as at 8th March 2017 must decide if they want their scheme to operate the overseas transfer charge and, if so, must submit a revised undertaking to HMRC by 13th April 2017. Any QROPS who fail to submit the undertaking will automatically cease being a QROPS from 14th April 2017. Therefore, from 14 April 2017 HMRC will suspend the ROPS notifications list and publish an updated list on 18 April 2017.