HMRC issued some proposals in December 2011 that affect all QROPS globally. HMRC invited comments during a consultation process that ended on 31st January 2012. We expect these changes to be announced formally in the UK Budget on 21st March, effective from 6th April and the Bill passed by July 2012.
Of course, there is no guarantee that this will happen, however a set of guidelines were accidentally posted (and removed within half an hour) on HMRC’s website on Wednesday 14th March 2012 which confirm all the points in the original proposals.
2. Why the changes?
As iFS has advised all clients, UK pension schemes have one fundamental purpose. That is, to provide the member with an income for life. In the event of the member’s death, then they will also provide an income or lump sum to their beneficiaries.
Regrettably, some advisers and scheme administrators have promoted the use of QROPS to take out much larger sums and in some cases, members have taken their entire pension scheme. HMRC has pursued some of these individuals for a tax charge of 55% on such sums drawn.
A large part of these reforms have thus been aimed at stopping this practice entirely and will ensure that some jurisdictions can no longer offer QROPS schemes, for example, New Zealand.
A second reason is that HMRC have been surprised by the vast sums being transferred out of the UK Pensions arena into QROPS. This figure stood at a total of GBP 1.4 billion at the end of 2010. The fact they are surprised when they impose a tax charge of 55% on death is in itself a surprise but nevertheless, it may be that they expect these changes to reduce the outflow of monies from the UK.
I suspect that all that will happen, is that everyone who transfers to a QROPS will now be forced to use their pension scheme correctly, and still be able to benefit from reduced (or nil) tax on death.
3. What are the main changes?
- 1. All members of the same QROPS must be treated equally.
- 2. Secondly, the ‘reporting period’ will be changed from 5 to 10 years.
In some countries, pensions law differentiates between local and non-local residents. If a scheme/country still has this difference on 6th April 2012, we expect them to be de-listed from the QROPS listing.
Currently, a QROPS trustee must inform HMRC of all benefits paid to scheme members if the member has been outside of the UK for 5 tax years or less. Under the new rules, they must report to HMRC for 10 tax years from the date of transfer. This change will apply to existing members.
4. How this affects Guernsey
Guernsey has been incredibly active and swift in dealing with these proposed changes and have been able to make changes to their own laws in order to comply, allowing the schemes themselves to change their scheme rules to ensure compliance from 6th April.
The States of Guernsey met on 6 March 2012 to consider, amongst other matters, an amendment to Guernsey Income Tax Law which would, in short, allow for the continued provision of QROPS pension schemes from the island (post 6 April 2012), by creating a new form of Guernsey Pension Scheme which will meet QROPS qualification criteria as set down by HMRC in their 6 December proposals.
In particular, it allows existing Guernsey QROPS to adopt the new regime thus meeting HMRC’s new Condition 4. This Condition requires the equal tax treatment of benefits paid from schemes for both Guernsey residents and non-residents. This is not currently the case, as Guernsey residents pay 20% income tax on benefits paid from their plans, whereas non-Guernsey residents may be exempted and have benefit payments paid gross. Without the new pension regime HMRC proposals would prevent Guernsey from providing compliant QROPS product within the context of the current Guernsey Income Tax Law after 6 April 2012.
Once passed by the Guernsey Government, the new income tax law amendment, will allow for continued compliance, and should become law on 27 March 2012.
Due to the swift change to Guernsey’s legislation, their schemes are able to change their rules to comply with the new provisions, in time for 6th April 2012.
Therefore, members do not need to do anything at all. The only change that will apply is the reporting requirement noted in Section 3.
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