UK Budget 2017 and QROPS
The UK Budget 2017 is a stealth tax on the self-employed and expats.
Self-employed Brits who want to move abroad may get hit by a triple whammy. Those transferring their pensions outside the EU, Australia or New Zealand could be hit with a 25% QROPS “exit tax”. National Insurance Contributions on the self-employed will rise from 9% to 11% affecting millions, whilst HMRC have introduced another stealth tax with UK VAT on roaming telephone bills outside the EU. So, anyone who is self-employed and wants to run their company from abroad and considering moving their pension abroad may be in for a triple shock.
The Effect of the UK Budget 2017 on UK Pension Transfers Abroad
Expats moving to the Middle East, Asia, Latin America, the Caribbean or Africa are punished, whilst those moving to Europe, Australia or New Zealand escape the 25% exit tax on a QROPS. Australia and New Zealand impose zero tax on pensions at retirement age. These new rules could well have an effect on expats choice of retirement with more pensioners choosing Australia, New Zealand or Europe as a retirement destination with the rest of the developing world being losers.
Anyone who is transferring a pension after 9th March, 2016 will not be able to transfer unless the new conditions are met. Anyone who transferred before will be locked in under old rules.
This will cause havoc for IFA’s and clients who may have spent six months or more carefully planning a pension transfer move. Once again, HMRC throw a spanner in the works for clients and planners.
Why treat pensioners unfairly depending on where they retire abroad? Well, we have already seen that HMRC have done this with state pensions, so they have a track history. They continue the trend with this tax on QROPS.
“HM Revenue & Customs (HMRC) has announced that Qualifying Recognised Overseas Pension Schemes (QROPS) transfers for individuals not in the European Economic Area (EAA) will be hit with a 25% tax charge”.
This measure ensures that transfers to QROPS requested on or after 9 March 2017 will be taxable unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer.
“This is a bad day and bad news for many expats. I have been warning potential clients for years that this might be coming, but most times it has fallen on deaf ears unfortunately”
You can read the full statement concerning the charge on transfers to QROPS, here.
This policy will hand the Treasury £60 million a year by 2021/22, the government said.
In documents released alongside the Budget today, HMRC said the tax treatment for QROPS transfers are broadly the same since 2006.
However the government is changing this in order to create ‘fairness in the tax system’, as these overseas pension transfers have already received tax relief in the UK. Obviously, this fairness doesn’t extend to those moving to Australia, New Zealand or low tax jurisdictions in the EU, whilst many could be taxed twice or even three times in Asia and other jurisdictions if the wrong QROPS is set up.
For transfers requested on or after 9 March, transfers to QROPS will be subjected to a 25% tax charge unless certain conditions apply. This charge will be made before the transfer is made.
These conditions include if the individual and the QROPS are in the same country after the transfer, the QROPS is in a country in the EEA or if the QROPS is an occupational pension sponsored by the individual’s employer.
‘Payments out of funds transferred to a Qrops on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident,’ HMRC added.
This policy will earn the government £65 million in 2017/18, £60 million in 2018/19, £65 million in 2020/21 and £65 million in 2021/22.
‘There are generally between 10,000 and 20,000 transfers to QROPS each year. It is expected that only a minority of these transfers will be subject to this policy,’ HMRC said.
However, this doesn’t tally up with QROPS providers such as STM Trustees who estimated they will lose 80% of new QROPS business and their shares plunged 20% on the news.
It seems very unfair to punish expats moving to some countries whilst others get off scot-free.
Which QROPS Will Be Affected?
- People moving to a Malta QROPS and living in the EEA will be unaffected
- People moving to Australia and using an Australian QROPS will be unaffected
- People moving to New Zealand using a NZ QROPS will be unaffected
- Anyone moving to a NZ QROPS, Malta QROPS, HK QROPS, an Isle of Man QROPS or a Gibraltar QROPS and living elsewhere in the world will be slammed by the UK tax man at 25% upon transfer
Proposed Revisions to QROPS Rules 2017/18
Legislation will be introduced in the Finance Bill 2017 so that:
- Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:
- both the individual and the QROPS are in the same country after the transfer
- the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
- the QROPS is an occupational pension scheme sponsored by the individual’s employer
- the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and
- the individual is employed by one of the employer’s participating in the scheme
- the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation
- UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer
- UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer
- The scheme administrator of the registered pension scheme or the scheme manager of the QROPS making the transfer is jointly and severally liable to the tax charge and where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue and Customs (HMRC). This applies to scheme managers of former QROPS that make transfers out of funds that have had UK tax relief, if the scheme is a QROPS on or after 14 April 2017 and at the time the transfer to the former QROPS is received
- Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident
HMRC will provide guidance setting out how the new tax charge will work and the new obligations.
UK Budget 2017 and the Pound
The chart below shows the pound is worth around 16% less than in March 2016 and is now at a seven-week low of $1.215.
UK Budget and Income Tax 2017
- Personal Allowance rises to 11,500 GBP. This is the amount before you start paying tax
- Threshold for 40% income tax is 45,000 GBP
- Threshold for 45% income tax is 150,000 GBP
- You start to lose your personal allowance is you earn over 100,000 GBP. It is steadily reduced according to your earnings above that threshold, reducing to zero for those earning 123,000 GBP or more per year from all your income sources.
Tax-Free Savings Accounts
- You can contribute 20,000 GBP per year tax-free into an Individual Savings Account (ISA). This can go into cash or stocks and shares. There is no tax on CGT or dividends, although it falls into IHT. However, this may be passed on to the spouse within 3 years to avoid UK IHT.
- New NS&I bond will be available from April and will pay 2.2pc on deposits up to £3,000
- There is also a Lifetime Individual Savings Account (LISA) where you can contribute 4,000 GBP per year and is topped up by the government at 1,000 GBP per year. This is supposed to be a mix of help to buy and a retirement fund for those aged 18 – 40. You can contribute until you are 50.
- You can only take out your cash penalty-free from a LISA at age 60 or if you are using it for a deposit on your first property, otherwise a 25% exit penalty is paid.
- For British expats, you can move both ISAs and LISAs into a QROPS to protect from taxes on death as long as you remain tax resident abroad.
Inheritance Tax and the UK Budget 2017
Each individual can pass on £425,000 without paying Inheritance Tax at 40%, so long as it includes the family home and passes directly to children or grandchildren, and not via a discretionary trust.
A QROPS and a QNUPS protects British expats from inheritance tax. A QROPS allows for existing UK pensions to be transferred overseas. A QNUPS is for monies which are earned outside the UK, but to protect the UK domicile from UK taxation as long as they are resident abroad. Many British expats don’t realise that due to their UK links such as owning UK property, they may still be assessable for UK inheritance tax on death.
UK Companies and the Budget 2017
Corporation tax will be cut from 20 per cent to 19 per cent and petrol duty will remain frozen until April 2018.
The tax-free dividend allowance for directors and shareholders of small private companies has been reduced to £2,000 from £5,000 from 2018.
National Insurance Contributions (NICs) and Budget 2017
Millions of self-employed will now pay more National Insurance Contributions: NICs rise from 9% to 11% for this group.
1.6m people will pay an average of £240 a year more for the National Insurance rise
Social Care and the UK Budget 2017
2 billion GBP to go to social care over the next three years to take burden off the NHS.
A tax-free childcare policy will also be introduced at the end of the year, with parents receiving £2,000 a year for each child under 12.
The Poor and the UK Budget 2017
National living wage will rise to £7.50 in April
Real wages have grown for 27 consecutive months, Hammond says.
Wages of lowest paid grew faster than the previous 20 years and the poorest households have seen their incomes rise by more since 2010 in the UK than in any other country in the UK.
Sugar tax levy confirmed at 18p and 24p per litre
Hammond says there will be no changes to duties on alcohol and tobacco.