Expats face 25 per cent tax charge on offshore pensions

British expats living abroad and foreign nationals based in the UK face being stung by a new 25 per cent tax charge if they move their pensions out of the UK.

New rules, which came into effect on Thursday after being announced in the Budget, will see the charge levied when retirement funds are transferred outside UK waters, unless they meet strict criteria.

The move is the latest in a series of crackdowns by the UK government aimed at reducing the use of offshore pension schemes for tax avoidance.

But experts said the crackdown could affect thousands of expats now living beyond the European Economic Area, or mobile UK employees who use third countries such as Malta or Gibraltar as their retirement fund base.

Under the measure, individuals outside the European Economic Area (EEA) and looking to transfer a UK pension via a qualifying recognised overseas pension scheme (Qrops) are most at risk of triggering the charge.

Pension savings amassed in the UK that are transferred abroad into schemes not meeting HMRC’s approval, such as a Qrops, are liable for UK tax charges, which can amount to half the value of the fund.

“With effect from March 9 2017, individuals who request an overseas pension transfer could potentially be affected,” said Gary Smith, financial planner at Tilney, the advisers.

“The transfer will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area or the Qrops is provided by an employer.

“If this is not the case, then there will be a 25 per cent tax charge on the transfer and the tax charge will be deducted before the transfer proceeds,” said Mr Smith.

Should the Qrops member’s circumstances subsequently change within five years of the pension transfer, it will be necessary to reassess whether or not an overseas transfer charge applies.

Experts said the tax charge would affect those who had UK pensions pots but who were living outside the EEA, for work or for retirement, but with no Qrops arrangement in their country of residence to receive their UK pension.

More people have found themselves in this position over the past 12 months as HM Revenue & Customs removed several countries popular with UK expats from its list of international schemes that meet the conditions for accepting UK retirement pots.

The delisted countries include the US, Canada, France and Italy. Those in blocked Qrops countries have no direct way to bring UK retirement cash into their country of residence, unless they first transfer the funds to a Qrops in a third country. Such locations may not be as tax-friendly as their country of residence.

“There are only 37 countries in the world where there are pension schemes which HMRC recognises as Qrops, and not all of those will be suitable for particular clients,” said James Badcock, partner at law firm Collyer Bristow. “So for those moving outside the EEA it may no longer be possible to transfer their pension.”

Experts said the offshore centres most likely to be affected by the latest clampdown include Malta and Gibraltar, which had grown in popularity as third country Qrops bases for UK citizens who are resident in countries which do not have a Qrops market, such as Singapore.

“Certainly the number of transfers through these jurisdiction are going to be hit,” said Gerry Kelly, chief operations officer at the Sovereign Group, an international Qrops administrator.

“These people will now have to pay a tax charge unless they are resident in the same place as the Qrops or leave the money in the UK, or find another Qrops in another country.”

Gibraltar, the British overseas territory which has been attractive to UK expats because of its lower income tax rates, is also expected to be affected by the UK chancellor’s clampdown.

“I think there is likely to be quite a change in appetite for people to move their pensions offshore because it is a large tax charge that is being proposed,” said Mike Ashton, senior executive with Gibraltar Finance, which promotes business development for the Gibraltar government.

Advisers cautioned that anyone looking to transfer their UK pension should seek financial advice, and warned there was still uncertainty over how Brexit would impact on transfers within the EEA.

“It is not inconceivable that once the UK leaves the EU, the new rules that offer slight flexibility to EEA residents will be removed, such that individuals resident in an EEA country would have to find a Qrops that is established in that EEA country,” said Jon Greer, pensions expert at Old Mutual Wealth.