The Chancellor of the Exchequer, Philip Hammond, has issued his first Budget. Although there had been speculation about further restrictions on pensions tax relief, these changes have not materialised. However, the Chancellor, as part of a wider crackdown on tax avoidance, has announced immediate changes affecting transfers to QROPS (qualifying recognised overseas pension schemes). We go on to consider these below.

The Budget documents also reveal that the government will amend the tax registration process for master trusts, to align it with the Pensions Regulator’s new authorisation and supervision regime; and that the money purchase annual allowance (MPAA) will, as proposed, be reduced to £4,000 from 6 April 2017.

The QROPS tax charge

Transfers to QROPS are currently tax-free. However, there has been increasing concern about transfers being made for pension liberation purposes. The Government is therefore introducing a 25% “overseas tax charge” on transfers to QROPS, targeted at those who seek to reduce the tax payable by moving their pension wealth to another jurisdiction. Importantly, the change will take effect for transfers requested on or after 9 March 2017 (i.e. tomorrow).

Exceptions will allow transfers to be made tax-free “where people have a genuine need to transfer their pension”. Such tax-free QROPS transfers will still be available where:

  • both the individual and the scheme are in countries within the European Economic Area (EEA);
  • if outside the EEA, both the individual and the scheme are in the same country;
  • the QROPS is an occupational pension scheme provided by the individual’s employer.

If an individual’s circumstances change within 5 tax years of the transfer, the tax treatment of the transfer will be reconsidered (e.g. if one of the exemptions now applies or has ceased to apply).

The Government will also widen the scope of UK taxing provisions so that, following a transfer to a QROPS on or after 6 April 2017, they apply to payments out of those transferred funds in the 5 tax years following the transfer.

Summary

The new QROPS tax charge introduces additional complexities, at short notice. Trustees and administrators should quickly review their overseas transfer processes and communications, as well as consider the fine print of the extensive draft legislation on QROPS, which was published today.

For further information, please speak to your usual contact at CMS.