Finance Act 2017 – foreign pensions

In Autumn Statement 2016, the Government said it would introduce measures to align the tax treatment of foreign pensions more closely with the domestic pension tax regime:

21 Foreign pensions – The tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pension tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones. The government will also close specialist pension schemes for those employed abroad (“section 615” schemes) to new saving, extend from 5 to 10 years the taxing rights over recently emigrated non-UK residents’ foreign lump sum payments from funds that have had UK tax relief, align the tax treatment of funds transferred between registered pension schemes, and update the eligibility criteria for foreign schemes to qualify as overseas pensions schemes for tax purposes.

It proposed to legislate for:

• The introduction of a 25% tax charge on transfers to qualifying registered overseas pension schemes (QROPS). The aim was to target those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction.
• The removal of the 10% deduction before foreign pension income is taxed.

Both these provisions attracted comment from outside stakeholders. In the case of the tax charge on transfers, the Chartered Institute of Taxation said that more safeguards were needed for people genuinely moving overseas. In the case of the removal of the 10% deduction on income, the Low Income Tax Reform Group said that the purpose of the deduction had been to reflect the extra cost that can be involved in having an overseas pension and called for measures to mitigate the impact.

Because the Prime Minister had announced a General Election on 8 June, the Finance Bill had its Second Reading in the Commons on 18 April, and then all its remaining stages on 25 (Commons) and 26 April (Lords). With cross-party support the Government some parts of the Bill, with the intention of legislating for them after the election. However, both the provisions on foreign pensions were retained. The then Treasury Minister Jane Ellison mentioned them briefly when setting out the Government’s approach to the Bill:

Clause 18 legislates for a significant anti-avoidance measure announced at the spring Budget. It will make changes to ensure that pension transfers to qualifying recognised overseas pension schemes requested on or after 9 March 2017 will be taxable. The charge will not apply if the individual and the pension savings are in the same country, if both are within the European economic area or if the pension scheme is provided by the individual’s employer.

Before the changes were announced in the spring Budget, an individual retiring abroad could transfer up to £1 million in pension savings, without facing a charge, to a pension scheme anywhere in the world provided that it met certain requirements. Overseas pension transfers had become increasingly marketed and used as a way to gain an unfair tax advantage on pension savings that had had UK tax relief. That was obviously contrary to the policy rationale for allowing transfers of UK tax-relieved pension savings to be made free of UK tax for overseas schemes. This charge will deter those who seek to gain an unfair tax advantage by transferring their pensions abroad. Exemptions allow those with a genuine need to transfer their pensions abroad to do so tax-free.

Clause 17 will make various changes in the tax treatment of specialist foreign pension schemes to make it more consistent with the taxation of domestic pensions. (HC Deb 25 April 2017 c1013-4)

The provisions are now in Finance Act 2017, s 9-10 and Schedules 3-4.