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HMRC finding it difficult to close Qrops loopholes

HM Revenue & Customs’ officials must be pulling their hair out at the attempts of jurisdictions to stay one step ahead of this April’s changes to the qualified recognised overseas pension scheme regulations. The ease with which Guernsey has come up with a solution to the abolition of expat-only Qrops surely means it is only a matter of time before the Revenue has another go at trying to shut the door.

HMRC’s new rules, coming in from April, will reduce some questionable Qrops transfer behaviour. The new 10-year reporting requirement will mean those wanting to use Qrops arrangements to escape paying tax legitimately due will now have to wait twice as long to do so.

The special requirement on New Zealand Qrops, that at least 70 per cent of the fund must be used to buy a pension income, rather than allow 100 per cent to be taken as cash as can be done at present, closes another door to those looking to liberate their pension cash.

But the requirement that Qrops jurisdictions desist from offering one scheme to expats and another to local residents looks to have been circumnavigated already by a simple bit of deft legal footwork.

Take the case of Guernsey. Under current rules, an expat with a Guernsey Qrops will pay no tax on pension income, while a pensioner resident in Guernsey will pay 20 per cent. Understandably keen to help its Qrops industry to flourish, the Guernsey government has got round HMRC’s requirement to have schemes open to all – clearly designed to make Qrops generally less attractive – by creating a new set of pension rules to run in parallel with the existing one.

From April, both types of Guernsey pension will be open to all but it is obvious that expats will use the new one, which offers no tax relief on the way in, but has no tax on income on the way out. Guernsey residents will stick with the old one, benefiting from tax relief on the way in but taxed on the way out.

Guernsey, and doubtless other jurisdictions who may do something similar, will be able to keep the third-country Qrops option alive.

But third-country Qrops are something HMRC is not happy about, which is why we could see it coming back to try and tighten things again.

There are legitimate reasons why an individual would want to transfer their pension to a provider based in a country other than the one they are retiring to. If you are moving to see out your days in Honduras or Thailand, for example, you may want to know your savings are held in a financial services institution based in a secure jurisdiction.

But in the vast majority of cases, UK retirees are moving to countries such as France, Spain, Italy, the US, Australia and South Africa, which all have robust financial systems.

If an individual is planning to become resident in any of these countries, and pay tax there, then what is wrong with moving his or her pension to a scheme in that country, HMRC might justifiably ask?

Qrops is in the sights of HMRC, as demonstrated this month when the Appeal Court found it was within its rights to deregister Panthera’s Singapore recognised overseas self-invested international pension retirement trust as a Qrops scheme. The judge found the scheme was not a Qrops because it was not clear it was open to Singapore residents to join it. That judgment means those unfortunate enough to have been advised to go into that scheme face the unpleasant possibility of an unauthorised payment charge.

There is no suggesting that those in third-party Qrops arrangements face anywhere near such a drastic fate. What we may see is Qrops providers having to change their structure again if and when HMRC tries to mend the hole in the net again.

John Greenwood is editor of Corporate Adviser

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Scrap QROPS then!!

  2. Author clearly doesn’t know a lot about the QROPS market. QROPS won’t be scrapped because the UK can’t restrict movement of pensions because of the EU. Third party jurisdictions are very useful for people who have moved to countries with restrictive pension regiemes and also for those who are likely to live in a number of different countries.

    Where HMRC is rightly clamping down is pension busting. This is likely to be come to an end which at the end of the day is what HMRC want.

    QROPS continue to offer significant benefits to the right client and long may they continue to do so. As an example, we had a client who had moved to northern cyprus. No DTA in place so was paying UK and Cypriot tax. Switch to a Malta QROPS, immediatly saved all of the UK income tax that they had been paying and also meant that there would be no 55% recovery charge on death (as the client had been out of the UK for more than 5 full tax year).

    Cracking bit of planning for all concerned and the client was very happy.

  3. Christopher Lean 21st March 2012 at 10:12 am

    Whilst the UK probably cannot stop free movement of capital, perhaps the Pensions Regulator/FSA could insist that only appropriate qualified pension transfer specialists deal with such movement of capital.

    Only a fraction of the offshore QROPS market has any qualifications or relevant experience. It was bound to go wrong.

  4. I believe the author may be incorrect in regards to the 10 year reporting rule.

    the receiving scheme will now have to report any withdrawls made within the first 10 years of the pension being transferred.

    However there is no change to the member payment charge where a member would be charged a penalty if they have not been non resident for 5 full tax years or more.

    This rule will still be in place so although the HMRC wish to know of any withdrawls within ten years, the member payment charge is only applicable within 5 full tax years of the client being non resident from the UK

  5. David Trenner - Intelligent QROPS 26th March 2012 at 8:33 am

    “Only a fraction of the offshore QROPS market has any qualifications or relevant experience. It was bound to go wrong.”

    Trustees of occupational schemes can – and should – question transfers to QROPS because they have a duty of care to the members. Trustees of SIPPs seem to shy away from any duty of care. Personal pension administrators don’t care one way or the other.

    The requirement by HMRC of the member signing another form is good in principal, but transferring to a QROPS involves so much paperwork that one more form to sign may not have any effect.

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