HMRC have alongside the draft clauses for the 2012 Finance Bill published a draft statutory instrument with the rather innocuous title of The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012 (the draft regulations).
The intention is “to make the QROPS regime operate in line with the policy intention” - which is that “ an individual who leaves the UK and transfers their pension savings should be in broadly the same position as someone who remains in the UK with their pension savings”
The draft regulations introduce four conditions that a scheme must satisfy to be and to remain as a QROPS. It is the second and the fourth of these conditions that introduce the changes we are referring to here.
The new conditions referred to above have the effect of:
Firstly, putting to an end with effect from 6 April 2012 the ability of long term non UK residents to transfer their pension fund to New Zealand and receive a lump sum of 100% of the fund.
As HMRC say “The Government has found that QROPS are being marketed extensively as a way of paying amounts or enabling the payment of amounts that are not allowed under UK rules (in particular 100% lump sums) once the UK tax rules no longer apply”.
This change introduces certainty of timing, as this was in effect already the subject of legislation passing through the New Zealand Parliament.
Secondly, introducing a new and unexpected provision (Condition 4) that requires uniformity of tax treatment of benefits for local and non local residents.
Using HMRCs words :
“If the country’s tax regime does not meet these conditions then schemes based in that country will not be able to be a recognised overseas pension scheme.
Looking at the system of personal income taxation of scheme benefits in the country where the scheme is established and ignoring any double taxation agreement rules, one of the following statements must be true:
1. There is no exemption from tax in respect of benefits paid to both resident and non resident members.
2. There is exemption from tax for non resident members and it also applies to resident members, regardless of whether the member is resident when they join the scheme or at any other time while they are a member. “
Ironically New Zealand pension schemes satisfy Condition 4 as there is no tax relief on pension contributions made by local residents, the fund is taxed, and there is no tax on benefits when paid out. No tax applies either on benefits made to non residents of New Zealand so “there is exemption from tax for non resident members and it also applies to resident members”.
This however would seem not to be the case with regard to Guernsey and the Isle of Man where pension schemes differentiate in terms the of tax treatment of benefits between local residents and non residents. So as local residents would be taxed on benefits and non local residents are not taxed on benefits condition 4 under the draft regulations are not satisfied.
No doubt there will be some serious lobbying to take place over the next few weeks to have this changed.
Other proposals in the draft regulations are concerned with, but only in relation to transfers to QROPS made after 5 April 2012, putting in place a new reporting period.
The five complete tax year rule as it relates to member payments and their taxation remains unchanged, but all the same schemes will be required to report payments made for a full ten years after the transfer takes place.
No doubt this extended reporting provision is to ensure that all schemes which are registered as QROPS satisfy the new conditions.
© Premier Pension Solutions – December 2011