What is the Tax on a QROPS When Returning to the UK?
Clients returning to the UK after working offshore and who hold a QROPS rather than a SIPP may well not pay any tax upon death on a QROPS. UK income tax would be paid on return, but tax upon death could well be avoided. This is the case even if you are offshore for a short period of time. There is no need for the ‘5 year rule’ as the pension would be under UK rules as far as taking your lump sum and taxes.
What happens to a QROPS if a client returns to the UK and what would be the tax on a QROPS if a client returned from working overseas back to the UK? Many advisors frown upon advising transfers to a Qualifying Recognized Overseas Pension Scheme (QROPS) if a client is returning to the UK.
But, we will demonstrate there are many cases where this would be beneficial due to HMRC’s treatment of tax on a QROPS even when the member becomes UK resident. Obviously each pension is different and should be looked at on its own merits. We will refer to statements from the Inland Revenue’s website in italics below.
Should you move your UK pension to a QROPS if you are living abroad, but intend to return to the UK?
“If you are moving abroad or have a job overseas you may want to transfer your UK pension rights, normally the value of your pension fund, to an overseas pension scheme.”
It is obviously OK to recommend a QROPS for those who have jobs overseas. What would be the tax charges on return to the UK?
“The general rule is that UK tax charges will continue to apply in respect of payments you receive from the QROPS so long as you remain in the UK and for up to five tax years after the year in which you leave the UK.”
What would the tax be if still UK resident under a QROPS?
“A UK resident can be a member of a pension scheme that is a QROPS and make transfers to that scheme”
“UK tax rules will continue to apply unchanged to any payments made by the QROPS to the UK resident member. So, if a UK resident member was paid a pension it would be taxable as pension income provided it was paid in accordance to UK rules”
…. In other words the income tax would be much the same way as a UK Self Invested Personal Pension (UK SIPP) on the pension income, but how about the tax upon death?
So, What Would Be the Tax on a QROPS When Returning to the UK?
The UK death tax on crystallised benefits prior to age 75 that applies to Defined Contribution [final salary] pension schemes is called the special lump sum death benefits charge and is 55%.
At age 75, the scheme automatically crystallises irrespective of whether the member has taken any benefits [lump sum or pension income].
For a Self Invested Personal Pension (UK SIPP), this 55% charge is normally deducted from the pension pot upon death.
If a QROPS is subject to UK tax rules when a member is a UK resident, then why is the 55% special death tax treated differently to a SIPP?
From HMRC’s website – Registered Pension Scheme Manual RPSM13102110 – application of charges to non-UK schemes: Member payment charges
The manual states that HMRC categorize the special lump sum death benefits charge alongside the unauthorized payment charges such as paying more than 25% pension lump sum or paying retirement benefits before age 55. Examples are then referred to as to how these charges would apply to overseas pensions and how they only apply to the UK tax relieved element.
So if it is the case that member payment charges [i.e. the 55% tax upon death] only applies to the UK tax-relieved element of an offshore pension, then what is the tax on the non-UK element of the pension and what would the tax on death be for a QROPS?
HMRC Statutory Instrument – Application of UK Provisions to Relevant Non-UK Schemes Computation of a members relevant transfer fund?
3. (a) – the amount crystallised by virtue of benefit crystallization event 8 on the transfer from a UK registered scheme.
This HMRC statutory instrument demonstrates in part 3 that the UK tax-relieved part of a QROPS is the amount that was crystallized upon the transfer from the UK to the QROPS.
The 55% member payment charge (MPC) upon death should therefore be based upon this figure as this would be consistent with how the MPC is applied in the Registered Pension Schemes Manual.
HMRC Statutory Instrument – Application of UK Provisions to Relevant Non-UK Schemes
4. (2) (a) payments made by the scheme to or in respect of the member are made out of the members UK tax relieved fund in priority to any other fund; and
(b) the amount of the members UK tax-relieved fund is reduced by the amount paid out of the scheme.
The instrument also states in part 4 that any payments made from the QROPS are deemed to be made first from the UK tax-relieved element.
Summary of Tax on QROPS for Clients Returning to the UK
Therefore, clients who have returned to the UK with a QROPS who then take their pension lump sum at retirement and then drawn down their pension in line with average life expectancy could be in a position where they exhaust the UK tax relieved element of their QROPS or at least put a very serious dent into it. As the 55% special pension death tax is based upon the UK tax-relieved portion of the QROPS less any payments, there might not be much left to base the tax upon, if anything at all.
Example of Tax on QROPS if Client Returns to the UK
For example, a British expat leaves at 45 to work in Singapore. He has a £100,000 pension pot. He returns from Singapore to live in the UK after 5 years at 60.
Assuming his pension pot grows at 4% after all fees and charges, he has a £220,000 pension pot at 60.
He takes a 25% cash lump sum of £55,000 at age 55 and the remaining pension pot of £165,000 gives him a pension income of £8,000 per year.
Client dies at 80 after taking 20 years’ worth of payments.
HMRC Tax bill on death = 55% tax on initial transfer minus any QROPS payments during lifetime. (£100,000 x 55%) – (8,000 x 20 years) = ZERO
So, the guy would not have a UK tax bill upon death under a QROPS, whereas he would have had around a £90,000 tax bill if he had been in a UK SIPP. This also applies to foreigners who have worked in the UK, for example, Singaporeans who have worked in the UK and return to Singapore for example. Click here for more on QROPS in SingaporeWhat Would Be the Tax on a QROPS if a Client Returned to the UK? by Richard Malpass