Puzzles Over Expat Pension

I am unsure if my overseas pension (QROPS) is free from UK inheritance tax? It seems the case if you remain offshore, but is a bit grey if you come back to the UK – even after five years away.

Stuart Ritchie, Chartered Financial Planner & Chartered Wealth Manager with expat financial advisers AES International, answered this question.

I am unsure if my overseas pension (QROPS) is free from UK inheritance tax? It seems the case if you remain offshore, but is a bit grey if you come back to the UK – even after five years away. My QROPS is held in a bond structure on the Isle of Man through a trustee in Malta. I think but am unsure that I can withdraw the initial sum tax free at 5% over 20 years. I was thinking of doing away with the costly trustee, but there are benefits such as not having to worry about “toxic assets”. HMRC class shares for instance as this if held in one’s name whilst not being offshore, this would severely affect what I want to invest in.

Stuart Ritchie answers: Pension funds, including QROPS, should be free of UK Inheritance Tax (IHT). This is because they are written in trust, and assuming you have completed a nomination of beneficiary form, then the benefits will remain outside of IHT.

Instead, pensions death benefits can be subject to income tax. The key factor is the age at which the pension member dies. If a member dies pre-75, then the (nominated) beneficiary has the option of a tax-free lump sum or tax-free income via drawdown. If the members dies aged 75 or over then the income is taxed at the beneficiary marginal rate of income tax, if they choose to draw it down.

The rules also allow the nominated beneficiary to pass on any unused drawdown funds on their own death to their own nominated beneficiary, known as a successor. The same tax treatment will apply but the relevant age will be the age of the death of the beneficiary rather than the original member.

The rule you have mentioned is the offshore bond rule, aimed at UK investors, in which you are able to withdraw 5% per annum of the original sum invested, with no immediate liability to tax. This rule is not applicable when it comes to pension funds held within bond (which is typically used to provide an investment platform). Instead any income withdrawn from the pension fund will be subject to income tax (dependent upon where you are tax resident). This applies to any withdrawals over and above the pension commencement lump sum (tax-free cash).

All pension arrangements must be administered by a trustee and therefore they cannot be removed.