Residential realities

January Retirement Strategy

For many UK expats or individuals considering migrating overseas to retire, deciding whether to transfer their accrued UK pension benefits to an overseas scheme or leave their UK pensions in the UK can be a major decision.

Among the key points to assess are the income, lumpsum, death benefits and investment opportunities that the overseas scheme can provide compared with the UK scheme.

However, since the introduction of the qualifying recognised overseas pension scheme legislation by the UK’s Revenue and Customs from April 6, 2006, an overseas scheme cannot simply apply their own local rules to UK pension funds transferred into their scheme.

Background
An outline for the current rules for UK overseas pension transfers were first introduced in the Finance Act 2004 and since April 6, 2006, a UK pension can only transfer abroad if the receiving scheme has been approved by the UK’s HMRC as a Qrops.

In order to get that approval, the overseas scheme has to fulfil the criteria set out in the UK pension scheme manuals and the relevant statutory instruments.

Among the responsibilities that a scheme approved as a Qrops has to undertake is reporting to HMRC. If an individual transfers their UK pension to a Qrops for a period of five complete tax years of the member’s overseas residency, the Qrops is obliged to report any payments made from the scheme (such as pension, annuity or lump-sum payments). Payments of this nature, within the reporting period, would have to be paid in line with the UK limits.

Outside the reporting period, however, the rules for payments can be (depending on the jurisdiction ) more flexible than those of a UK scheme and it is this part of the legislation that has caused some confusion with Qrops scheme administrators and advisers alike when considering investments.

Investments within Qrops Whether you are an IFA offering investment advice or a Qrops provider promoting investments within your product, a potential Qrops member has to be aware that certain types of asset are considered “taxable property” within a Qrops.

Tangible moveable property such as fine art, antiques, jewellery, fine wine, boats, classic and vintage cars, stamp collections and rare books, for example, are all considered taxable property within Qrops.

So is residential property and it is residential property investment as taxable property that may cause some Qrops schemes and their members the biggest problems.

Tax charges
On October 27, 2009, HMRC updated the revenue pension scheme manuals to confirm that residential property is a taxable property and that the reporting period, that is applicable for payments to members, does not apply to permitted investments. Therefore, the Qrops scheme is obliged to report to HMRC if a member has a residential property within their Qrops investment portfolio, irrespective of the length of time that the member has been non-UK tax resident, and the member is subject to a UK tax charge on that property.

Although HMRC clarification has appeared recently, the rules on residential property as taxable property have been in force since April 6, 2006 and there is major concern that many Qrops members have invested in residential property because they had been incorrectly advised it was permitted to do so outside of the reporting period.

The unauthorised payment tax charge that is applied by HMRC is a hefty 40 per cent of the property’s value. In addition, the Qrops administrator would be liable to a scheme sanction charge of 15 per cent.

On top of the unauthorised payment and scheme sanction charges, there is also a 40 per cent tax charge on any gain that may arise on sale of the property and any income generated from the property would also be taxed at 40 per cent.

Example
Mr Green has lived in Greece since 2000. He had a UK pension that he transferred to a Qrops after April 6, 2006 that now has a value of £400,000. He was incorrectly advised by his scheme, as he had been outside the UK for more than five years, that he could invest his funds within the Qrops in residential property.

Mr Green buys the residential property with the £400,000 and it sits in the Qrops where the value increases to £500,000.

As a result of the residential property purchase, Mr Green is subject to an unauthorised payment charge of £160,000 (£400,000 x 40 per cent). In addition, there is a scheme surcharge of £60,000 (£400,000 x 15 per cent). Should Mr Green decide to sell his property now, with a profit of £100,000 on this, he would be subject to a further 40 per cent tax on the gain (£40,000).

Conclusion
Although the HMRC clarification of the taxable property rules on October 27, 2009 is a recent announcement, the actual rules themselves have applied to Qrops since April 6, 2006.

Therefore, anyone that has invested in residential property within their Qrops since that time could be facing a hefty tax bill.

 

 

 

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