Readers of a certain vintage may remember those TV ads of yesteryear for Radio Times magazine, which ended with the cheesy strap line: "I never knew there was so much in it!" This phrase immediately sprang to my mind when I was trying to bite the corners off the Finance Bill 2017, which is as thick as a standard house brick and about as digestible. I soon realised that my fanciful idea of producing a single CAPITAL letters edition to summarise the Bill was next to impossible because "there was so much in it". I have therefore decided to produce a trilogy instead, with this edition covering overseas pensions, the second IHT reforms and the third non-dom reforms/protected trusts. Incidentally, you will get your household tip at the end of the third edition, so please don’t complain when you do not see one at the end of this edition.
Harmonisation of overseas pensions with UK pensions
Harmony is a word which is trending in the Treasury at the moment, I think because it sounds Eastern and holistic. We all like a bit of harmony after all, don’t we? Of course, the real reason to harmonise overseas pensions is to increase the tax take.
Let's start with the good news: overseas pensions (and yes, that includes QROPS and QNUPS) will get a tax free lump sum of 25%, just like UK registered pensions. However, the bad news is that the 10% deduction from pension income will disappear. I think that's a fair trade, if it stopped there.
Taxation of lump sums
It didn't stop there and the next innovation was quite surprising - HMRC intends to tax all lump sums received from overseas pensions, even if received by a non-resident (unless you are non-resident for more than five years). This will include payments to members during their lifetimes or to other persons (presumably dependents after the death of the member) and would appear to extend not only to 'tax relieved funds' like QROPS but also to self-funded QNUPS which have received no tax relief whatsoever. I should point out that the proposed tax on lump sums will only extend to the portion of the payment which exceeds the 25% tax free allowance.
The Bill is silent on whether this is intended to override any double tax treaties, so I'm assuming that treaty relief will still be available if you are residing in a country with a useful DTA.
The only good news is that it will only apply to pension contributions made post 5th April 2017, meaning that existing IPPs, QNUPS and so on will not be affected. However, for new schemes these rules will be a considerable factor and will influence behaviour. I do not expect to see a great impact on QROPS as, generally speaking, these have been funded from untaxed income so it's no great hardship to suffer income tax on the way out. However, for self-funded QNUPS the idea of turning all your capital into income for perpetuity doesn’t sound attractive.
QROPS – member payment provisions
If you have a QROPS then you are caught by the same member payment provisions that are applied to registered schemes in the UK. The reason for this is simple - in both cases the member has received some form of tax relief on funding. Presently these provisions – which apply tax charges on the happening of certain events – will not catch a QROPS where the member has been non-UK resident for five years. HMRC clearly thinks this is an insufficiently long period as it has doubled it to ten years.
The practical effect of this is that if you want to do anything exciting with your QROPS fund (for instance transfer it to a non-QROPS scheme) after you have left the UK then you will have a very long wait before you can do so without any penalty. The only good news is that this particular change will not affect any existing schemes, only those which are funded post April 2017.
QROPS – qualifying conditions
The Treasury has published a new Statutory Instrument (after all, we don’t have enough of them already) which contains a new set of qualifying conditions. This is the third major change to the QROPS conditions since they were invented and, I suspect, it will not be the last given that a Brexit will require fundamental re-write of most of our pensions rules. There have been no changes to the definition of a QNUPS, curiously. Here are the details for the changes to QROPS:
- Remove the requirement for pension schemes to designate a minimum of 70% of the funds that have had UK tax relief to be used to provide the member with an income for life.
- Non-EEA schemes - introduce a requirement that either (a) the provider of a scheme is regulated to provide pensions and the jurisdiction has a tax treaty under s788 of the Income and Corporation Taxes Act 1988; or (b) pension schemes are regulated by a body in the country where the scheme is established.
- ROPS can now pay benefits earlier than pension rule 1 – at 55 – but only where such payments would be authorised member payments under a registered pension scheme.
The last major revision of the rules wiped out Guernsey's business and I think this next change will potentially harm the Isle of Man and Jersey, unless those jurisdictions explicitly regulate pension providers or set up a pension regulatory body. I think this will also adversely affect Gibraltar's business because it does not have a treaty with the UK and I am assuming that it will not be considered part of the EEA for these purposes (but I'm happy to be proved wrong on the last point).
The main effect of these changes is, more or less, fair enough. The reason for the 10% deduction on foreign pensions was because of the lack of a tax free lump sum. So, if you get your tax free lump sum then there is no reason for the deduction anymore. The taxation of lump sums exceeding 25% also makes sense in these 'flexi draw-down' days and is therefore consistent with the policy to-date, up to a point.
That point is whether the funds in question are tax relieved – if they are then I have no objection to any of the changes. However, where they are not tax relieved (such as self-funded QNUPS) it is difficult to see the policy justification. I expect these rules will be a deadly blow to the nascent QNUPS industry.
I should also remind readers that these new rules are intended to supplement, not replace the existing rules. For instance, this means that if you have a scheme which in any way is employer financed, other than a registered UK scheme, then you are still caught by the disguised remuneration rules (DRR) which, as you know, leads to an employment tax charge on everything that leaves an offending scheme (unless an exemption applies). So, if you manage to navigate your way around DRR you will then walk into these new rules, unless your scheme was pre April 2017 funded.
Finally, the further revision of the QROPS conditions means that the list of qualifying jurisdictions potentially gets ever smaller. The only sure survivor is Malta as it is a member state of the EU. Gibraltar is not 'another member state' so, along with Jersey and the IOM, it will need to make sure that pensions are regulated – and seen as regulated – so that it can carry on doing this kind of business.