Uk Government Revising Qrops Rules

[GuestHouse]

The UK Government is proposing changes to the QROPS Regulations, key issues per below.

If you have a QROPS or are planning on setting up a QROPS in the near future you should discuss the following with your financial advisor - If you have a Guernsey or IoM based QROPS you should certainly be getting advice on the impact of these proposed changes.

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 key changes.

The new conditions have the effect of :

1.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.

This change introduces certainty of timing, as this was in effect already the subject of legislation passing through the New Zealand Parliament.

2. 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 ( Section 50C schemes in particular) 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.

This is therefore a huge issue for Guernsey as unless condition 4 is revised or Guernsey law changes no Guernsey scheeme will qualify as a QROPS after 5 April 2012.

[Mobi]

Thank you for bringing these proposed changes to our attention.

At first I was concerned that the legilsation would be retrospective, but I dug out a few other press reports on this subject which seem to suggest that the new rules will only apply to QROPS taken out after April 2012.

This from Qrops.net:

December 8, 2011

The government has announced an unexpected revamp of QROPS pension rules to stop tax abuses.

Tough new rules designed to re-establish a QROPS as a retirement savings plan rather than back-door access to release pension cash early.

The main change for QROPS investors is the doubling of the reporting period from five to 10 years.

From April 2012, HMRC proposes that if a QROPS investor is UK resident or has been UK resident at any time during the 10 full tax years before a payment is made out of the funds transferred to the QROPS, the individual will be subject to the UK tax rules that would apply to similar payments made by UK registered pension schemes.

If the payment made by the QROPS relates to taxable property, tax charges will apply in the same way that they would apply to a registered pension scheme. The reporting period does not apply to taxable property transaction but lasts for the life of the QROPS.

Other rules will give QROPS investors and providers stricter guidelines, including:

• Revision of QROPS qualifying conditions

• Investors must sign up to a tax promise detailing penalties if QROPS rules are broken

• Pension providers must speed up reports notifying transfers of funds

HMRC suggests that the changes have no cost implications for taxpayers, QROPS investors or providers – but the new rules will affect around 5,000 ex pats each year.

The announcement makes up part of the Finance Act 2012 and the revisions are expected to become law in April 2012.

Draft legislation posted with the announcement does not include any retrospective provisions, which means any QROPS transactions carried out under the current rules will not be affected by the rule change.

“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,” said an HMRC spokesman.

“The government is publishing changes to the QROPS regime for consultation on whether they achieve the intended effect. The changes are intended to make the QROPS regime operate in line with the policy intention.

“The government will continue to keep the QROPS system under review to ensure that it is used in a manner consistent with the principle for which tax relief on pensions is provided.”

From ‘Qrops Specialists’

...The consultation closes on 30 January 2012 and any changes in QROPS rules would come into effect in April 2012.

If you are considering a QROPS, they normally take 3 – 6 months to transfer, so now may a good time to move before any changes take place....

From FT Adviser

The government has issued draft legislation to amend the conditions that a scheme has to meet to be a qualified registered overseas pension scheme (Qrops).

The Qrops regime allows transfers of pension savings from UK registered pension schemes to QROPS to be made free from UK tax.

HM Revenue & Customs (HMRC) told FTAdviser these are draft clauses for the Finance Bill, so the rules have not yet changed.

HMRC is looking to change the rules for Qrops as it has found that some schemes are being marketed as a way to obtaining payments from UK pension savings that, under UK rules, would lead to tax charges.

HMRC wants to hear feedback on these clauses by the end of January.

A spokesperson for HMRC said this formed part of its tax avoidance strategy.

He said: “The revenue voted to tighten up the rules as people are using them as tax avoidance which is not how they are intended to work. Firms are setting up purely as a service to divert pensions offshore to avoid paying tax on pensions.

“The intention [of the changes] is to ensure that the rationale for allowing transfers to Qrops to be made free of UK tax is followed, therefore, draft legislation to amend the Qrops regime is published for consultation.

More

“We are preserving the ability for those intending to leave the UK to take their pension savings with them to continue saving and provide an income when they retire.”

A spokesperson for Grant Thornton said: “Changes have been announced to revise the conditions that a scheme has to meet to be a Qrops and change the information and reporting requirements from 6 April 2012.

“This appears to be a crack-down on the use of overseas pension schemes albeit around transparency of information.”

Alan Reynolds, technical manager at IFA London & Colonial, said: “My understanding is that the revenue are tightening up the rules to prevent abuse. Some people are moving money away overseas then taking out the whole amount as a lump sum which was not the intention of the regulation.”

Geraint Davies, managing director of Montfort International, said: “This shows that Qrops have become more mainstream. This is excellent news and will put an end to this abuse. We have seen what is a wonderful concept abused very openly by others and it has been tarnished by this.

“We could see this change coming for a while. Some schemes, particularly in New Zealand, were clearly dubious and had a flagrant attitude. HMRC have reviewed these schemes and know where and what to look for.”

Subject to comments received, the legislation will take effect from 6 April 2012.

[fletchsmile]

Thanks for the updates gents. The UK pension system and related legislation seems more of a mess each day.

A couple of decades back when I became an expat, I stopped contributing to any UK pension schemes, unless my employers required me to do so, to get their contributions. I stopped any private schemes, and only continued to company schemes where the employer would contribute as well and I couldn't negotiate cash cash from them instead of their contribution.

With hindsight, I'm happy to have taken this view. It minimises private UK pensions amount, and then what to do about all the inconveniences associated with them, plus the ever changing rules. So if you minimise private pensions in the first place, then decisions like QROPs or not needn't be an issue. QROPs have a place to help certain people out, in the same way UK pensions have a place for some peoplpe.

I appreciate some people have "legacy issues" and are in company schemes where their employer contributes, and some people have many years pension history before becoming an expat. However, once you become an expat, it's an excellent opportunity to reconsider your whole involvement with the UK pension system, and change the future going forward at least. In many cases it might make sense to stop paying into UK schemes and look elsewhere.

As an expat there are plenty of alternatives to UK pensions, so trying not to get too caught up in the whole system in the first place when given a choice worked for me

BTW State pension is a different ball game to play or not

Edited December 10, 2011 by fletchsmile

[GuestHouse]

I don't know where the idea that these proposed changes will only impact QROPS taken out after April 2012 comes from.

The propsals contain clear indication that the tax regimes within which QROPS schemes reside shall be required to apply equity of taxation Onshore v Offshore.

To me that reads if a restired resident of the jurisdiction in which a QROPS scheme is hosted pays tax on his pension then QROPS pension holders in that jurisdiction must also pay tax.

It's a clear choice for the legislatiors in QROPS hosting.jurisdictions - Play by the rules or loose QROPS status - See Singapore.

Its a lucrative business that I doubt any of the QROPS jurisdictions want to loose. So taxes here we come.

The suggestion to move to QROPS now before the changes are agreed or put in place is dangerously flawed.

The professional advice I mention above perhaps ought to be truly independent of anyone involved in QROPS sales.

[GuestHouse]

And I note, this has been news for a while now ..... Though has had no mention in the local "market"

[Mobi]

I don't know where the idea that these proposed changes will only impact QROPS taken out after April 2012 comes from.

The propsals contain clear indication that the tax regimes within which QROPS schemes reside shall be required to apply equity of taxation Onshore v Offshore.

To me that reads if a restired resident of the jurisdiction in which a QROPS scheme is hosted pays tax on his pension then QROPS pension holders in that jurisdiction must also pay tax.

It's a clear choice for the legislatiors in QROPS hosting.jurisdictions - Play by the rules or loose QROPS status - See Singapore.

Its a lucrative business that I doubt any of the QROPS jurisdictions want to loose. So taxes here we come.

The suggestion to move to QROPS now before the changes are agreed or put in place is dangerously flawed.

The professional advice I mention above perhaps ought to be truly independent of anyone involved in QROPS sales.

There is no doubt that HMRC can and do make retrospective tax grabs, as they did in the case of Singapore, and until the draft legislation is finalised it is all guess work. However, I have only found one person in a newsletter 'comments' section who has felt that the new rules will be retrospective. For the most part,if the publications and blogs mention it at all, they make statements like:

"It is not expected that these changes will be imposed retrospectively on QROPS schemes that are already in place."

The legislation seems mainly directed to the 100% lump sums that were taken in new Zealand and also in other territories where large amounts have been withdrawn which would not have been permitted in a UK scheme. The revenue seem concerned that some of these pensioners may spend all their money and become a burden on the UK State in their dotage. It seems to be this issue rather than the tax avoidance angle which is driving the legislation.

That's my take on it, but who knows for sure?

Watch this space, I guess.

[wordchild]

This is undoubtably significant news. There will be a period of consultation but past history of these things would suggest that there wont be major changes. It is no real surprise that there has been a move to block 100% payouts from funds , as allowed in New Zealand, (often regarded as the QROP bad boy). However this also seems designed to block any ongoing taxfree payments from funds beyond the initial (upto) 30%. This would potentially remove one of the major advantages of QROPS.

Ironically New Zealand ( because of the local tax treatment of pension payments), could end up as a beneficiary of all this. Funds located there may still be allowed to make payments taxfree. (but not the 100%)

Guernsey up to now has been regarded as the safe location for a QROP (i have one there myself). On the face of it this is a blow for funds located there and, there will either have to be a change in the local taxation of pensions ( unlikely? ) or, they will have to start taxing payments from QROP funds based there. The same applys to the IOM. QROPS have been a growing source of revenue for both islands this will be a blow to both.

Having said all that, in my case, it is still much better to be subject to Guernsey income tax (at 20 %) than to be subject to UK tax rates.

Edited December 12, 2011 by wordchild

[AyG]

I guess we won't have a clear idea how disastrous this will be until the revised rules are published some time after the closure of the consultation period at the end of this month and before April. The key points for me will be:

1. Are the changes going to be applied retrospectively?

2. Will pensioners get the Guernsey tax-free personal allowance of £9,050/year?

If the answers are "yes" and "no" respectively then the relatively high charges for my QROPS and the new tax may well mean that my decision to transfer my pension pot offshore was a mistake.

[AyG]

Apparently, Concept Group - one of the big QROPS providers in Guernsey is suggesting (based upon the proposed legislation) that existing QROPS will cease to be QROPS, so will be able to continue to pay out pensions tax free.

Source: http://www.cgl.gg/#/news-existing-members/4558721347

[wordchild]

i just got an update today from my QROP providor in Guernsey, looks like Guernsey have just changed their local pension rules to allow tax-free pension payments to residents (but no benefit on the way in now). This would seem to get around the HMRC issues regarding level taxation treatment between local funds and offshore funds. So it should still allow taxfree payments from Guernsey based QROPS to offshore based indeviduals. So maybe the worst fears have not been realized!

Like Guesthouse i am slightly surprised by the absence of any comment from the local (Thai based) IFA/QROP pushers. Maybe when there is a real issue with their products that requires knowlege and information as opposed to just bluster and the "trust me i am an expert" bullshit it just gets too difficult!

Edited January 30, 2012 by wordchild