Offshore pensions – QROPs and other anachronisms
Do you know what has happened in the world of offshore pensions recently? The most recent ‘target’ of HMRC’s attention has been the island of Guernsey, which had forged a lucrative market in setting up Qualifying Recognised Offshore Pension Schemes (or QROPS for short).
QROPS were particularly attractive to those people wishing to move their UK pensions offshore, without triggering a hefty UK tax charge. Then suddenly in April of this year, HMRC changed the rules. Find out what happened to Guernsey below.
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The new non-discrimination rules
With effect from 6 April 2012 HMRC introduced the Registered Pension Schemes and Recognised Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012. These included a provision, known as the ‘non-discrimination’ rule. This stated that an offshore pension could not treat local residents and non-residents differently.
Guernsey fell foul of this new rule because only local residents paid Guernsey tax (at 20%) on their pensions, whereas a non-resident of Guernsey could receive their pensions tax-free. HMRC therefore announced that Guernsey pensions no longer qualified as QROPS.
Changes to Guernsey legislation
Guernsey then tried to change its own pension legislation to comply with the new rules, by introducing a new Section 157E Guernsey scheme. The intention was to have a special pension scheme that did not discriminate between residents and non-residents of Guernsey. However, again HMRC were unimpressed. In May 2012, Regulations were introduced to confirm that the new Section 157E Guernsey scheme could only be a QROPS if it is solely open to Guernsey residents. It would not be possible to open the scheme to non-residents of Guernsey.
If you had looked at the list of QROPS (on HMRC’s website) before 6 April 2012, you would have seen hundreds of Guernsey QROPS. If you look at the same list now, you will see just over 20 Guernsey QROPS, which presumably are the only ones that are open solely to Guernsey residents.
Effect of this change
So what do these changes mean? Well, first there is no need to panic. HMRC have confirmed that the changes introduced in 2012 are not retrospective. Whereas Singapore offshore pensions were retrospectively removed from the list of approved QROPS, the change to Guernsey schemes has no effect on transfers made prior to the change of rules. This means there is no problem, from a UK perspective, with any transfers made to a Guernsey QROPS prior to the change of rules.
However a former QROPS cannot receive any further transfers from UK pensions. Were funds to be transferred now from a UK pension, to a former QROPS, then this would be an unauthorised transfer and tax of 55% would be due on the amount transferred.
A former QROPS will now be classed as a “relevant non-UK scheme” (RNUPS) and, although it is not a QROPS, the scheme is still subject to UK rules. For example, any limit in the scheme rules as to the amount the member can take as a lump sum will still apply. Normally that limit is a maximum of 30% of the pension fund, with the remaining 70% having to be used to provide an income. This will still be the case, even though the scheme is no longer a QROPS, so members can’t take all their funds as a lump sum just because their scheme has been ‘de-listed’.
Also, there is no change to the income tax position on a pension paid from a former QROPS. If the member is non-UK resident, no UK tax will be due (but local tax may well be payable). If the member has moved back to the UK, then income tax will be due on the income he or she receives from the offshore pension, although there is a special rule so that only 90% of the income is subject to tax (or the remittance basis can apply if relevant).
There may also still be other restrictions on the pension, even though it is no longer a QROPS. First, if the pension is an Investment-Regulated Pension Scheme” (IRPS), then the prohibition on investing in ‘taxable property’ applies without any time limit. An IRPS is any scheme where the member or a related person can (directly or indirectly) direct, influence or advise on how his fund is invested (Finance Act 2004, Schedule 29A). Taxable property is residential property and high value chattels (e.g. motor cars, art, jewellery, wine).
So care is still needed with the investments of a pension that is a former QROPS. The safest approach is to say that if the scheme is an IRPS, it should never invest in taxable property.
Similarly, care is needed if the member wishes to transfer his funds from the former QROPS to another scheme. A transfer to a UK pension or to a pension that still qualifies as a QROPS would be fine. This might be useful if the member does still wish to contribute to the pension or wishes to transfer further UK pension funds offshore.
On the other hand, a transfer to a scheme that is not a QROPS or a UK registered scheme will trigger UK tax charges unless the member has been non-UK resident for five full tax years.
However, even though these restrictions may apply, the offshore pension trustees may have no obligation to report either the investment in taxable property or the pension transfer to HMRC. This is because the scheme no longer falls within the QROPS reporting requirements. Similarly, the new 10 year reporting period for QROPS does not apply to an ex-QROPS.
Be cautious. If the Plan does make an onward transfer, especially where the receiving scheme allows benefits to be taken in a more flexible manner, care will be needed if the transfer could result in the 30% maximum lump sum rule being breached.
Specific advice should be obtained before any transfer from a former QROPS to another scheme.
Inheritance tax issues
There are specific exemptions from inheritance tax (‘IHT’) for UK pensions, so that no IHT is due when the member transfers money to the pension or when the member dies. Similarly, the special IHT charges for trusts (every 10 years and whenever capital ‘exits’ the trust) do not apply to UK pensions.
These exemptions also apply to any offshore pension that is a ‘Qualifying Non-UK Pension Scheme’ (QNUPS). The definition of QNUPS is found in the Inheritance Tax (Qualifying Non-UK Pension Scheme) Regulations 2010.
An offshore pension that is no longer a QROPS may well still be a QNUPS. Whilst the 2010 QNUPS Regulations followed a very similar format to the original QROPS rules, the 2012 changes (which de-listed Guernsey QROPS) did not apply to the definition of a QNUPS.
It is, of course, possible that HMRC may in the future seek to impose further criteria for an offshore scheme to qualify as a QNUPS, for example to set limits on lump sum payments or to meet the ‘non-discrimination’ requirement imposed by the 2012 Regulations. So far no such changes have been proposed.
The recent changes mean that Guernsey is no longer able to set up QROPS to receive UK pension transfers, unless the member is actually moving to live in Guernsey. However there is no need to panic, as the de-listing of Guernsey QROPS was not retrospective.
Whilst this means no further UK pension funds can be transferred, other UK rules do still apply to a former QROPS, such as the limit on the pension lump sum or the restrictions on investing in taxable property. A former QROPS should also still qualify for the IHT exemptions.
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