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HMRC internal manual

Employment Income Manual

The taxation of pension income: Pensions taken as flexible drawdown: temporary non-residence: main conditions for sections 576A and 579CA to apply

EIM74050 outlined the basic proposition whereby flexible drawdown taken by an individual whilst temporarily resident outside the UK will be charged to income tax on their return to the UK. For sections 576A and 579CA to apply, all four of the conditions in subsection (2) of each section must be met. Three of the four conditions refer to specific ‘residence requirements’: an individual satisfies those residence requirements for a tax year if during any part of that tax year he is resident in the UK and not Treaty non-resident.

An individual is Treaty non-resident at any time if, at that time, they fall to be regarded as resident in a territory outside the UK for the purposes of double taxation relief arrangements having effect at that time.

First condition: (2)(a)

The individual must satisfy the residence requirements for a tax year, known as ‘the year of return’.

Second condition: (2)(b)

There must be one or more tax years immediately before the tax year of return in which the individual did not satisfy the residence requirements, but prior to those tax years in which the individual did not satisfy the residence requirements there is at least one earlier tax year in which he did satisfy the requirements.

Third condition: (2)(c)

There are fewer than five tax years between the year of departure and the year of return. (The ‘year of departure’ is the last tax year before the year of return in which the individual satisfied the residence requirements.)

Fourth condition: (2)(d)

The individual satisfied the residence conditions in four of the seven tax years immediately preceding the year of departure.

If all of these four conditions are met, sections 576A and 579CA ITEPA provide that flexible drawdown paid during a year of non-residence to a scheme member or to a dependant from a registered pension scheme or a UK tax-relieved fund in an overseas pension scheme and which would not otherwise be chargeable to tax as pension income under part 9 ITEPA, is to be treated as arising or accruing in the tax year of return to the UK for the purposes of sections 575 and 579B ITEPA..

If at least one of the four conditions is not fulfilled then no charge to income tax can arise under sections 575 and 579B on flexible drawdown paid during the intervening years of non-residence.