The government has confirmed it will change the way qualifying recognised overseas pension schemes (QROPS) are taxed, with the aim of limiting inconsistencies in the tax treatment of UK and foreign pension savings.
The Finance Bill, issued on 5 December 2016, confirmed the government would bring the tax treatment of QROPSs in line with UK registered pension schemes. From 6 April 2017, 100% of the income received from a QROPS by an individual who is a UK resident for tax purposes will be subject to UK income tax, it said.
Currently only 90% of QROPS income is subject to UK income tax, meaning higher-rate payers are taxed at only 36%, which will become 40% following the changes.
Old Mutual Wealth personal financial planning expert Rachael Griffin pointed out QROPS are now a mainstream pension solution for expat clients, and the levelling off of market growth since 2006 suggests the QROPS market is maturing at around £1.5bn a year.
She said: “The average size of a QROPS transfer is more than £100,000, highlighting the importance of these cases from a UK revenue perspective.”
“Equalling out the tax treatment of UK and foreign pension schemes has been much anticipated. There remain clear advantages to using QROPS for people who are at risk of reaching the lifetime allowance limit on their UK registered pension scheme, and looking to move permanently overseas.”
‘70% Rule’Old Mutual Wealth believes it is “essential” the inheritance tax exemptions afforded to QROPS is maintained. The firm also expects to see similar provision on the removal of the 70% rule for inheritance tax exemptions for QROPS, believing it will be beneficial for consumers.
However, the draft of the Finance Bill issued alongside the Policy Paper does not address the removal of the 70% rule, despite promises inside the paper it would.
A recent government paper proposed easing the rule, saying schemes would still qualify as QROPS as long as the provider is regulated or the scheme itself is regulated.
As it stands, some QROPSs are limited in the pension benefits they can provide, as a minimum of 70% of the pension fund needs to provide an income for life.
The government also wants to bring QROPS in line with pension freedom rules.
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