Guidance

Pension Tax for overseas pensions

Updated 3 January 2017

The consultation period for this draft guidance finished on 1 February 2017.

Chapter 1 - conditions a scheme must meet to be qualifying overseas pension scheme (QOPS) or recognised overseas pension scheme (QROPS)

The conditions a scheme has to meet to be a QOPS or a QROPS are changing with effect from 6 April 2017.

There’ll no longer be a requirement for certain schemes to use at least 70% of a member’s UK tax-relieved funds to provide an income for life.

Schemes that can currently meet the requirement to be a QOPS or a QROPS only by complying with this condition need to consider the new rules and how, or if, they can continue to meet the conditions to be a QOPS or QROPS from 6 April 2017.

Actions you should take

QOPS or QROPS scheme managers

1. Check if your scheme will meet the new conditions.

2. If your scheme doesn’t meet the new conditions from 6 April 2017 you must tell HM Revenue and Customs (HMRC) within 30 days of that date. Use form APSS251B to give HMRC the information.

3. If your scheme will stop being a QROPS from 6 April 2017 you should take action to stop transfers being received by your scheme after 5 April 2017. Any transfer from a registered pension scheme received by your scheme after 5 April 2017 will be an unauthorised payment and both the member and the transferring scheme administrator may be taxed on the transfer.

Registered pension scheme administrators

You may be asked to transfer to a scheme that tells you it is a QROPS:

1. Check to ensure that the scheme you’re making the transfer to continues to be a QROPS after 5 April 2017. You’re responsible for ensuring your pension scheme doesn’t make unauthorised payments.

2. If either the member or the overseas pension scheme manager tells you that the scheme will stop being a QROPS from 6 April 2017 you shouldn’t complete any transfer to the scheme after 5 April 2017. If the transfer is received by the foreign pension scheme on or after 6 April 2017 you will be liable to the scheme sanction charge.

3. If you’re processing a requested transfer out and either the member or overseas pension scheme manager asks you to stop the transfer you should not make the transfer. Any transfer received on or after 6 April 2017 by a scheme that ceased to be a QROPS from 6 April 2017 will be an unauthorised payment and you will be liable to the scheme sanction charge.

Members

If you wish to transfer to a non UK pension scheme and that scheme is neither a QROPS nor a registered pension scheme you will be liable to a tax charge of at least 40% of the amount of the transfer.

You’re responsible for ensuring that the non UK pension scheme is either a QROPS or a registered pension scheme when the transfer is made.

Advisers

Those providing advice in respect of pension transfers should ensure that the scheme they are recommending a transfer to continues to meet the conditions to be a QROPS after 5 April 2017.

Overview of changes to the overseas pension schemes conditions

To be a QOPS or a QROPS a scheme must meet the conditions to be an overseas pension scheme. There are 2 main tests that a scheme has to meet to be an overseas pension scheme:

• regulatory requirements test
• tax recognition test

Currently schemes set up by international organisations don’t have to meet either of these tests, but the scheme rules have to provide that at least 70% of a member’s UK tax-relieved funds are used to pay them an income for life.

Detailed guidance on the conditions a scheme currently has to meet be an overseas pension scheme is in the Pensions Tax Manual at PTM112200.

From 6 April 2017:

• the conditions of the regulatory requirements test will change
• overseas public service pension schemes will no longer have to meet the regulatory requirements test
• an overseas public service scheme is set up, under statute and regulations or with government approval, solely to provide benefits to or in respect of, service rendered to the country or territory, or any political sub-division or local authority
• schemes set up by an international organisation outside the UK to provide benefits to, or in respect of, their employees will be overseas pension schemes

The tax recognition test will not change and will continue to apply to overseas public service pension schemes.

New regulatory requirements test

Currently if there is a regulator of the type of pension scheme in the country or territory in which the scheme is established, the scheme must be regulated by that regulatory body. If the scheme is not regulated it can’t be an overseas pension scheme.

If there is not a body that regulates pension schemes, a scheme can still be an overseas pension scheme if one of the following applies:

• it is established in a EU member state (other than the UK), Norway, Liechtenstein or Iceland
• the scheme rules require that at least 70% of the member’s UK tax-relieved funds will be used to provide them with an income for life

From 6 April 2017 how a scheme satisfies (passes) the regulatory requirements test will depend on whether or not it is an occupational pension scheme.

Occupational pension schemes

If the scheme is an occupational pension scheme and there is a regulator of such schemes in the country or territory in which it is established, it must be regulated by that regulatory authority. If the scheme isn’t regulated it fails the regulatory requirements test.

If the scheme is an occupational pension scheme and there is no regulator of such schemes in the country or territory in which the scheme is established the scheme will pass the test.

Non-occupational pension schemes

If the scheme is not an occupational pension scheme and there is a regulator of such schemes in the country or territory in which it is established, the scheme must be regulated by that regulatory authority. If the scheme isn’t regulated it fails the regulatory requirements test.

If there is no scheme regulator the scheme may still pass the regulatory requirements test if it established in an EU member state (other than the UK), Norway, Liechtenstein or Iceland.

If there is no regulator for non-occupational pension schemes in the country or territory in which the scheme is established, there may be a regulator of the scheme establisher or provider (a financial services regulator).

If there is a financial services regulator the scheme may still pass the regulatory requirements test if the pension scheme provider is regulated. Just like for UK schemes, the requirement is that the scheme provider is regulated by the financial services regulator and that it is regulated for the activity of setting up and running the pension scheme.

If there is a financial services regulator, but the scheme provider isn’t regulated in relation to the setting up or running of pension schemes, the scheme fails the regulatory requirements test unless the scheme is established in an EU member state (other than the UK), Norway, Liechtenstein or Iceland.

Overview of changes to the recognised overseas pension scheme conditions

To be able to be a QROPS, in addition to being an overseas pension scheme the scheme must also meet the conditions to be a recognised overseas pension scheme (ROPS).

Currently, unless the scheme is set up by an international organisation or is a public service pension scheme, to be a ROPS the scheme must meet both of the following:

• the pension age test
• the benefits tax reliefs test

To be a ROPS all types of scheme must meet one of the following conditions:

• be established in an EU member state (other than the UK), Norway, Liechtenstein or Iceland
• be established in a country or territory (but not New Zealand) with which the UK has a double taxation agreement with provisions for exchange of information and non-discrimination
• at the time of the transfer the rules of the pension scheme require at least 70% of the amount transferred to be used to provide an income for life, no benefit to be payable before normal minimum pension age (currently age 55) unless the member is retiring due to ill-health and the scheme is open to residents of the country or territory in which it is established - if the scheme is established in Guernsey and approved under section 157E of the Income Tax (Guernsey) Law 1975 it must also be closed to non-residents

Detailed guidance on the conditions a scheme currently has to meet be a ROPS is in the Pensions Tax Manual at PTM112300.

From 6 April 2017:

• there will be a change to the pension age test
• the condition that a scheme has to use 70% of the funds transferred to provide an income for life will be removed

From 6 April 2017 to be a ROPS a pension scheme must be established in one of the following:

• an EU member state (other than the UK), Norway, Liechtenstein or Iceland
• a country or territory with which the UK has a double taxation agreement that makes provision for exchange of information
• a country or territory with which the UK has a tax information exchange agreement (TIEA)

If the scheme is established in Guernsey and approved under section 157E of the Income Tax (Guernsey) Law 1975 it must also be closed to non-residents.

Pension age test

Currently the pension age test requires that payments can’t be made to the member if they are under the normal minimum pension age (55) unless they are retiring due to ill-health.

There are certain authorised payments a registered pension scheme can make to a member aged under 55, for example a refund of excess contributions lump sum.

From 6 April 2017 the pension age test will be amended to allow schemes to make payments to members aged under 55 if the payment would be an authorised payment if it was made from a registered pension scheme.

Authorised payments that can be made to a member aged under 55 are:

• a serious ill-health lump sum - see PTM063400 for payment conditions
• a short service refund lump sum - see PTM045000 for payment conditions
• a refund of excess contribution lump sum - see PTM045000 for payment conditions
• a winding-up lump sum - see PTM063600 for payment conditions

Schemes set up by international organisations

The term international organisation has a specific meaning. It doesn’t simply mean a multi-national employer that has branches or subsidiaries in many countries.

To be an international organisation you must have a UK Order in Council specifying you are treated as such within the meaning of the International Organisations Act 1968.

Examples of international organisations include the United Nations and the European Union.

From 6 April 2017 the conditions a scheme set up by an international organisation has to meet to be a ROPS will be that:

• the scheme is set up for the purpose of providing benefits to or in respect of employees of the international organisation
• the scheme is established in one of the following:
  • an EU member state (other than the UK), Norway, Liechtenstein or Iceland
  • a country or territory with which the UK has a double taxation agreement that makes provision for exchange of information
  • a country or territory with which the UK has a TIEA

Chapter 2 - taxation of payments from foreign pension schemes or annuities

Currently UK tax can arise on payments, including deemed payments, made from a foreign pension scheme that is not a registered scheme or from a foreign annuity under the following provisions:

• the member payment charges under Schedule 34 Finance Act 2004
• the taxable property charges under Schedule 34 Finance Act 2004
• pensions taxable under Chapter 4 Part 9 Income Tax (Earnings and Pensions) Act 2003 (ITEPA)
• annuities taxable under Chapter 10 Part 9 ITEPA
• relevant steps taxable under Part 7A ITEPA (employment income provided through third parties)
• relevant benefits paid under an employer-financed retirement benefits scheme (EFRBS) taxable under Chapter 2 Part 6 ITEPA

Changes will be made to how payments from foreign schemes and annuities are taxed to ensure consistent tax treatment with payments from registered pension schemes.

The member payment charges

Certain payments from a relevant non-UK scheme (RNUKS) are taxable in the UK if the member is UK resident when the payment is made or has been UK resident in any one of the previous 5 tax years.

A RNUKS is, broadly, a non-UK scheme that contains funds that have benefited from UK tax relief. The UK tax charges that may apply to a payment from a RNUKS are collectively known as ‘the member payment charges’.

Guidance on the definition of a RNUKS and when UK tax charges apply can be found in the Pensions Tax Manual at PTM113210.

The time limit during which the member payment provisions apply will be extended so that the member payment charges will apply if, at the time of the payment, the member is UK resident or has been UK resident in any one of the previous 10 tax years.

The extended time limit will apply to:

• transfers made from a registered pension scheme on or after 6 April 2017
• pension inputs into an overseas scheme on or after 6 April 2017 that have benefited from UK tax relief

Changes to taxation of pension payments

Currently only 90% of a foreign pension or annuity payable to a UK resident (except those claiming the remittance basis) is chargeable to UK tax.

For individuals who aren’t UK domiciled and are claiming the remittance basis, the amount of foreign pension or annuity chargeable to tax is the amount remitted to the UK.

Guidance on the current tax treatment of foreign pensions can be found in the Employment Income Manual at EIM74500.

From 6 April 2017 the whole foreign pension or annuity payable to a UK resident will be chargeable to tax. This means that pensions paid to UK residents will be taxed in the same way whether the scheme is based in the UK or overseas.

This change doesn’t affect the taxation of:

• foreign pensions or annuities paid to non-domiciled individuals claiming the remittance basis
• certain pensions paid following the death of a member or a beneficiary aged under 75, which will remain tax free

Changes to taxation of lump sum payments

From 6 April 2017 lump sums paid by non-UK pension schemes to UK residents will be taxable regardless of the type of pension scheme paying the lump sum. However the taxing provision and the taxable amount will depend on the nature of the scheme making the lump sum payment.

Registered pension schemes

If the non-UK scheme is registered, any lump sum will be taxable in the same ways as lump sums paid from a UK based registered pension scheme. The taxation of lump sums paid from registered pension schemes remains unchanged.

Relevant non-UK schemes

Tax charges under Schedule 34 Finance Act 2004 (see PTM113210) continue to apply to payments that are referable to a member’s relevant transfer fund, or UK tax-relieved fund (see PTM113230 for definitions) and will apply to payments referable to a member’s ring-fenced transfer fund.

A ring-fenced transfer fund is the equivalent of a relevant transfer fund for transfers made on or after 6 April 2017.

Where a member has exhausted their UK tax-relieved and transfer funds the ‘member payment provisions’ under Schedule 34 no longer apply to payments made from the scheme.

Once the member payment provisions no longer apply to the scheme, if the RNUKS is also an employer-financed retirement benefits scheme (EFRBS) any lump sum payment will be taxable under the EFRBS rules.

If the lump sum isn’t taxable under the EFRBS provisions it will be taxable as set out in the section Other foreign pension schemes below.

Employer-financed retirement benefit schemes

Tax charges under either Chapter 2 Part 6 or Part 7A ITEPA will continue to apply to lump sum relevant benefits paid from EFRBS, including where the EFRBS is based overseas.

However, the exemption or reduction for foreign service currently given by section 395B (where the tax charge arises under Part 6 ITEPA – see EIM15021), or section 554Z4 (where the charge arises under Part 7A – see EIM45720), will be removed in respect of lump sums paid on or after 6 April 2017 where:

• the lump sum is provided under an EFRBS established outside the UK, and
• the recipient of the lump sum is resident in the UK in the tax year in which it is received

Therefore, when a lump sum is paid from an overseas EFRBS to a UK resident recipient, the whole amount of the lump sum will be taxable, subject to any reduction in respect of the employee’s own contributions (see EIM15071) or any of the exclusions under Part 7A (see the guidance beginning at EIM45601).

Other foreign pension schemes

Lump sums paid from these schemes will be taxable as pension income under Part 9 ITEPA. The amount taxable as pension income depends on the type of scheme making the payment.

1. If the lump sum is a commutation of a pension that is not taxable in accordance with any of the provisions of Chapter 17 Part 9 ITEPA, then that lump sum will not be taxable.

2. If before 6 April 2017 a member accrued rights specifically to be paid as a lump sum then, to the extent that the lump sum is referable to those pre-6 April 2017 rights, the lump sum will not be taxable. In this context where the member had the choice to be paid pension rights as either a pension and/or a lump sum this is not a specific provision for a lump sum.

3. If the scheme is an overseas pension scheme (which has a specific meaning as set out in PTM112200) part or all of the lump sum may be paid tax free. If the lump sum is the equivalent of one of the authorised lump sums paid under a registered pension scheme it should receive the same tax treatment. For example, for the equivalent of an uncrystallised funds pension lump sum paid to a member aged under 75 (see PTM063300), 25% will be tax free and 75% will taxable as pension income.

4. If the scheme is not an overseas pension scheme then there is no tax-free amount (apart from any deduction under point 2 above).

Chapter 3 - taxation of non-UK registered schemes

A pension scheme can be a registered pension scheme regardless of where the scheme is based. However the scheme will need a scheme administrator that is based in the European Economic Area.

A new chapter 5A of Part 4 Finance Act 2004 will, with effect from 6 April 2017, specify how the tax rules apply to non-UK registered schemes. This will replace the current non-statutory advice on how the legislation applies to non-UK-based registered schemes that is published at PTM114000.

These changes are made to ensure it is clear how the UK tax rules apply to schemes established overseas for individual members that have no connection to the UK. They also allow for the tax rules to apply to a proportion of a member’s funds under the scheme, rather than all or nothing.

A non-UK registered scheme is a registered pension scheme that is established (based) outside the UK.

With the exceptions of the annual allowance and taxable property provisions, the general rule is that Part 4 Finance Act 2004 and supporting regulations will apply to non-UK registered schemes only to the extent of the UK-relieved funds.

For example, if a member of a non-UK registered scheme has no UK-relieved funds, they will not be liable to the lifetime allowance charge and the scheme administrator doesn’t need to give that member a BCE statement (a statement setting out how much lifetime allowance has been used up by a benefit crystallisation event, see PTM164400) when they crystallise benefits under the scheme.

UK-relieved funds

UK-relieved funds are funds that have benefited from UK tax relief and are the total of all the following amounts:

1. Sums or assets that directly or indirectly represent sums or assets that were at any time held for the purposes of a UK-based registered pension scheme.

That is a transfer either directly from a UK-based registered pension scheme or via a chain of transfers. For example funds transferred from a UK-based registered pension scheme to a QROPS and then transferred to the non-UK-based registered scheme will be UK-relieved funds.

This includes not just the transfer itself, but any investment income and growth attributable to that transfer. So if, for example, the only funds relating to a member derived from a transfer from a UK-based registered pension scheme then all of the member’s funds are UK-relieved funds.

1. Sums or assets that directly or indirectly represent sums or assets that were at any time held for the purposes of a ‘relieved member’ under a RNUKS. See PTM113210 for guidance on the meaning of the terms RNUKS and relieved member.

This amount includes a transfer of a relieved member’s funds either directly from a RNUKS or via a chain of transfers. The amount includes not just the transferred funds, but any investment income and growth attributable to that transfer.

1. Sums or assets that relate to benefits or rights the member has accrued under the scheme for which the member is taken to have benefited from UK tax relief. Regulations will specify when and to what extent a member is taken to have benefited from UK tax relief. Accruing benefits in this context means:

• in the case of a defined benefits, cash balance or hybrid arrangement there are presently arrangements for the accrual of benefits in respect of the member under the arrangement
• in the case of an other money purchase arrangement (a money purchase arrangement that is not a cash balance arrangement):
  • a relievable pension contribution (see PTM044100) is paid by, or on behalf of, the member
  • an employer pays a contribution in respect of the member
  • the member’s employer makes a contribution, but not in respect of the member, and the contribution subsequently becomes held for the purposes of an other money purchase arrangement for the member

Lifetime allowance provisions

The lifetime allowance provisions under Part 4 Finance Act 2004 apply only to the extent of UK-relieved funds. So if a member has total funds of £1 million under the scheme, but only £700,000 are UK-relieved funds the total amount of BCEs under the scheme will be limited to £700,000.

The lifetime allowance provisions include not only the lifetime allowance charge but also include the provision for lifetime allowance enhancement factors. So the provisions for lifetime allowance enhancement factors don’t apply in respect of funds that are not UK-relieved funds. This means that:

• members can’t apply for non-residence factors in respect of pension funds or rights held under a non-UK registered scheme (see PTM095300)
• the amount of lifetime allowance enhancement factor that may be claimed on a transfer from a recognised overseas pension scheme (see PTM095400) will be limited to the funds that are attributable to UK-relieved funds, for example funds transferred in from a QROPS where the funds originated from a UK-based registered pension scheme

Annual allowance provisions

Pension inputs made to a non-UK registered scheme will count towards the annual allowance. Regulations will specify to how the annual allowance rules apply to members who accrue benefits under the scheme.

HMRC currently intends to use its regulation-making powers to apply the annual allowance provisions where the member is a relevant UK individual (PTM044100) provides guidance on the meaning of the term ‘relevant UK individual.

Taxable property provisions

Taxable property is residential property and tangible moveable property.

The taxable property provisions are defined at paragraph 1 Schedule 29A Finance Act 2004 and include section 174A, and section 185A to 185I and Schedule 29A.

Detailed guidance on the taxable property provisions can be found in the Pensions Tax Manual from PTM125000.

The scheme administrator of an investment-regulated pension scheme (see PTM125100 for definition) is liable to tax charges when their registered pension scheme:

• acquires an interest in taxable property
• improves taxable property that the scheme already holds
• converts or adapts non-residential property to residential property
• each year the scheme continue to invest in taxable property
• when the scheme disposes of taxable property

The scheme members of an investment-regulated pension scheme are also liable to unauthorised payments charges when their scheme acquires or improves taxable property, or converts non-residential property to residential property.

These tax charges arise whether the scheme holds the property directly or indirectly.

The taxable property provisions apply in full to a non-UK registered scheme - their scope is not limited to UK-relieved funds.

So, for example, if a non-UK registered scheme that is an investment-regulated pension scheme holds residential property in the UK, the scheme administrator will be liable to the scheme sanction charge in respect of the income from that property, even if the scheme contains no UK-relieved funds.

The draft section 242B Finance Act 2004 gives HMRC the power to make regulations that may specify when the taxable property provisions will not apply or to limit their application in specific circumstances.

HMRC currently intends to use its regulation making powers to give the following effects:

• tax charges on the scheme administrator under section 185A and 185F Finance Act 2004 (tax charges on investment income and gains) will apply regardless of whether, and to what extent, a scheme holds UK-relieved funds, however, such tax charges will arise only if the taxable property is either directly or indirectly held in the UK.
• members will be liable to any unauthorised payments charges arising by virtue of section 174A Finance Act 2004 to the extent of their UK-relieved funds

Such regulations can’t be made or laid until after the Finance Bill 2017 has finished its Parliamentary stages and received Royal Assent.