Over the borderline

Mike Morrison discusses the growth of QROPs

One of the areas of pension planning that has grown considerably over the last few years has been that of Qualifying Recognised Overseas Pension Schemes (QROPS).

The current regime is still complicated and is still to develop fully but recent developments have included the continuing negotiations to get Gibraltar on to the list of approved QROPS jurisdictions and into the similar position of Malta.

But what are QROPS for? Is it a regime to facilitate the movement of pensions for individuals who decide to leave the UK permanently or is it a regime to allow the unlocking of pension money?

Well, I think it should be the former, but I fear it is still being treated by many advisers as the latter.

Exodus

More and more people are leaving the UK for a variety of reasons, even before the latest reported exodus supposedly as a result of proposed higher taxes, and it is into this equation that the concepts of residence and domicile must be assessed to decide whether expatriates maintain any residual UK tax liability.

It is also important to remember that membership of the European Union brings with it a presumption of free movement between the participating nations.

The rules around QROPS mean that the scheme manager of the QROPS must agree to tell HM Revenues & Customs (HMRC) when they pay benefits from the transferred fund or make a further pension transfer from it. The individual will be subject to the usual unauthorised payment tax charges if the overseas pension scheme makes any payments from the transferred fund that would not have been authorised payments under a UK registered pension scheme.

The reporting duty back to HMRC ends after the scheme member has been out of the country for at least five years. The QROPS scheme manager does not have to notify HMRC of payments if the QROPS scheme member is not resident in the UK when the benefit payment is made, and has not been resident in the UK earlier in the tax year, or in any of the five preceding tax years.

At this point, the benefits become specifically subject to the rules of the QROPS and more particularly to the pension legislation in the jurisdiction concerned.

So whether it is tax efficient to take the pension money from the UK to the QROPS will depend on the tax situation of the individual concerned in the country of residence and any taxes that have to be deducted in the QROPS location. In theory, it could be possible to end up worse off if the individual becomes tax resident in a country which has higher tax rates than the UK.

One of the sticking points for Gibraltar was the fact that they charge no tax on income for those over 60 years old.

Specialist advice

So, specialist tax advice is vital regarding the tax regime in the jurisdiction of the pension scheme and the tax regime in the jurisdiction in which the benefits will be received. In such considerations, the existence of a ‘double taxation treaty’ is likely to be important when it comes to tax liability, particularly on death.

It has also been suggested that by transferring a UK pension scheme to a QROPS, this could be taken onto account in trying to establish a new domicile of origin for tax purposes.

One of the problems with trying to establish a new domicile has been the length that needs to be gone to, to show a real attempt to sever all links with the original domicile. This has been revisited in the media recently with the case of Robert Gaines Cooper who has been fighting a long-standing case with HMRC to establish that his domicile is now the Seychelles where he has lived for more than 30 years. HMRC still see the fact that he maintains a mansion near Henley as his ‘chief residence’ as evidence of a continuing UK domicile and therefore tax liability.

Expatriate tax planning is likely to become a growth area with some large sums in dispute and it could well be important to make sure that any pension benefit that was built up in the UK becomes ‘resident’ in the most suitable jurisdiction.