UK Expats: Beware The Pension Transfer Tax

A new overseas pension transfer tax could see the UK taxman take a quarter of expats’ transferred funds. Those thinking of moving UK pensions need to know the new rules.

One of the few surprise announcements in the UK Spring Budget was the ‘Overseas Transfer Charge’ – an immediate tax on certain transfers to offshore pension schemes. According to Jason Porter, director of expat financial advisers Blevins Franks, for some expats, this could divert a quarter of their transferred pension funds to the UK taxman.

Previously, expats could move UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS) without paying UK tax. This applied regardless of residency or where your QROPS was based, unless your total funds exceeded the lifetime pension allowance (currently £1 million). Since 9 March, however, under certain circumstances HM Revenue & Customs (HMRC) can automatically claim 25% of funds being transferred – of any value.

While HMRC expect this will only touch a fraction of the approximate 15,000 QROPS transfers each year, they anticipate collecting an extra £315 million by 2022.

The good news is that this will not affect most expats moving pensions to their country of residence, nor those transferring to approved schemes elsewhere. Specifically, you will not be liable for the tax charge if one of the following applies:

  • Both you and your QROPS are in the European Economic Area (EEA)
  • You and your QROPS are based in the same country outside the EEA
  • The QROPS is run or sponsored by your employer.

Currently, the EEA includes all 28 EU member states (including Gibraltar for this purpose) as well as Iceland, Norway and Liechtenstein. So generally only those moving UK pensions to excluded jurisdictions in which they are not resident – such as Switzerland, Guernsey, Monaco or other perceived tax havens – will be liable for 25% taxation. Even so, it is possible to get this tax refunded if their situation changes to meet one of the exemption conditions within five years of transferring.

For expats resident in a non-EEA area such as Monaco, liability can be avoided so long as they transfer to a QROPS located in the same place.

Transferred UK pension funds remain taxable by HMRC for five full tax years. So if your circumstances change to bring you in line for the transfer tax, you could still face a 25% tax bill on the initial transferred value. This could happen, for example, if you become tax resident in a non-EEA area within five tax years of transferring.

It could also apply if you move funds from a QROPS to another scheme (an ‘onward transfer’) that does not meet the criteria for tax-free transfers. Other than being based in a non-approved jurisdiction outside the EEA, a pension scheme could invite tax penalties for allowing members to access their funds under the UK age limit of 55.

Note that the five-year clock starts ticking from 5 April following the transfer date. This means that the period for HMRC liability can actually be closer to six years, especially for transfers made on or just after 6 April in any given year.

Before you relocate or move your QROPS, therefore, you should consider the impact on your tax liabilities.