QROPS (Qualifying Recognised Overseas Pension Scheme)

A Qualifying Recognised Overseas Pension Scheme (QROPS) is a recognised overseas pension scheme which has provided information and evidence to HMRC that:

• the scheme satisfies all the requirements as described for a recognised overseas scheme; and

• has undertaken to notify the HMRC if the scheme ceases to be a recognised overseas scheme and supply them with information when making certain payments.

In the Autumn Statement of 2016, the government announced major plans to prevent QROPS from being misused to provide a more favourable tax position for those who do not intend to leave the UK on a long-term basis.

Previously only 90% of the income from a QROPS was currently subject to income tax for a UK resident. Now 100% of the income is liable to UK tax (as with UK pensions income) and this, with other changes, reduces the potential tax advantages of UK residents transferring to, or investing in QROPS.

A QROPS must tell HMRC when they make a ‘payment’ in respect of a member who has a ‘relevant transfer fund’. Payments include not just pension and lump sum payments, but also any transfer out of the scheme. A relevant transfer fund is created when a member transfers in sums and assets from either:

• a UK registered pension scheme, or

• another overseas pension scheme that is a relevant non-UK scheme.

  This rule applies to payments made in respect of a member’s:

  • UK tax-relieved funds that were built up after 5 April 2017

  • ring-fenced transfer funds with a key date of 6 April 2017 or later.

  The member payment charges do not apply to payments from these types of fund if both:

  • at the time the payment is made (or is treated as made) the member is not UK resident

  • the member was neither UK resident earlier in the tax year nor UK resident in any of the 10 previous tax years.

    Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for ten tax years after the date of transfer, regardless of where the individual is resident.

This rule applies to payments made in respect of a member’s:

• UK tax-relieved funds that were built up before 6 April 2017

• relevant transfer funds

• ring-fenced transfer funds with a key date earlier than 6 April 2017.

For payments from these types of fund, the member payment charges do not apply if both:

• at the time the payment is made (or is treated as made) the member is not UK resident

• they were neither UK resident earlier in the tax year nor UK resident in any of the 5 previous tax years.

For payments made in respect of a ring-fenced transfer fund with a key date of 6 April 2017 or later, the member payment charges apply for a period of 5 years beginning with the key date for the particular ring-fenced transfer fund.

This means that even if the member has been non-resident for longer than 10 full tax years the member payment charges can still apply if it is less than 5 years since the funds were transferred from a registered pension scheme.

For the 10 years from the date that the UK pension benefits are transferred to the QROPS, the trustees of the overseas pension scheme must report once a year to the UK’s HMRC to confirm continuing qualification with the rules.

They also must report payments made to the member (or their dependants) from the scheme. After 10 years, this reporting requirement falls away.

This change was announced by the Chancellor in the Spring Budget 2017. Certain transfers to QROPS, requested on or after 9 March 2017, are subject to a 25% overseas transfer charge.

As detailed above, currently when a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS) their pension funds are tested against the available Lifetime Allowance (BCE8) and an LTA charge of 25% is applied on any excess. If the transfer value is below the available LTA then there would be no excess tax charge; this process remains.

However, in addition to any LTA charge, the whole (post BCE 8) transfer value of certain transfers to QROPS, requested on or after 9 March 2017, will be subject to an additional 25% overseas transfer charge.

The overseas transfer charge will apply unless at least one of the following applies:

• both the individual and the QROPS are in the same country after the transfer

• the QROPS is in a country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein, in the context of this Gibraltar is considered part of the EU as part of the UK) 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 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 to provide benefits in respect of past service and the individual is employed by that international organisation.

If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply 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 a change of circumstances means that 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).

Scheme managers of existing QROPS needed to decide whether they wished their scheme to continue to be a QROPS following the introduction of the overseas transfer charge. If they wished to continue, they had to make an extra undertaking to HMRC to operate the overseas transfer charge by the 13 April 2017. If HMRC did not receive the revised undertaking the scheme will have ceased being a QROPS on 14 April 2017. There is no right of appeal if a scheme stopped being a QROPS in these circumstances.

If a transfer payment is from a Recognised Overseas Pension Scheme (ROPS) or a Qualifying Recognised Overseas Pension Scheme (QROPS) the member can apply to HMRC for an enhanced Lifetime Allowance (LTA). The member must claim this enhancement no later than 5 years after 31 January following the tax year in which the transfer payment was made. It is the member's responsibility to ensure that he/she applies for the appropriate LTA enhancement.

When an overseas transfer is received, the scheme will normally write to the customer pointing out:

• they may be able to apply for an enhanced LTA if the transferring scheme was a ROPS or a QROPS

• the transferring scheme should be able to confirm if they are a ROPS or QROPS

• they should speak to HMRC and/or a financial adviser about this.

Based on the 2023 bill, the Government intends to reduce LTA tax charges to 0% for the 2023/24 tax year, with a change in the taxation of death benefits. Additionally, there will be protection in place for those with LTA protections to maintain their higher entitlement to Pension Commencement Lump Sum.

Therefore, for the 2023/24 tax year there will still be a LTA in force and providers will still require all of the usual information for Benefit Crystallisation events even though the tax charge is intended to be 0%.

If the overseas scheme is in payment (i.e. the equivalent of drawdown) this will be treated as a crystallised benefit (i.e. no payment of a further PCLS).

If the pension from the QROPS/former QROPS is in the equivalent of Capped Drawdown the receiving scheme must also be on a capped drawdown basis, unless the individual chooses to convert the funds to flexi-access drawdown).

If the client is under 75, it would however be immediately subject to a LTA test under BCE1 and LTA charges can apply. This could mean that the LTA is exceeded (as there may have already been a BCE8 if the funds had been transferred abroad in the past) or other BCEs that have happened previously.

The member may be able to get an enhancement factor on their LTA (see above).

Not accepting these transfers in this manner would create an unauthorised payment with the associated tax charges applied.

QROPS were introduced on 6 April 2006 to satisfy EU legislation in respect of the free movement of capital. In April and May 2012, however, HMRC introduced new regulations imposing a requirement that schemes enjoying QROPS status should be open to, and offer the same tax treatment to, local residents as well as non-residents.

As a result, HMRC delisted over 300 Guernsey-based schemes which were open to both Guernsey resident and non-resident members from its approved list of QROPS such that any new transfers to them would have to be taxed for non-residents at the same income tax rate as local residents. QROPS for Guernsey resident members only were largely unaffected.

However, existing transfers to Guernsey-based pension schemes that had previously satisfied the requirements to be a QROPS were ‘grandfathered’ under the old QROPS regime in Guernsey. It was noted that members of such schemes could continue as members without issue and the associated benefits would remain intact, but no further transfers from a UK-registered pension scheme could be made.

Members of Guernsey-based pension schemes that were formerly recognised as QROPS are generally now considered to be members of a Relevant Non-UK Pension Scheme (RNUKS) - a non-UK scheme that contains funds that have benefited from UK tax relief.

There is no obligation for members of an RNUKS in Guernsey to transfer out of the scheme unless there is a specific issue and/or change in circumstances that they wish to address. For example, unlike RNUKS managed in other jurisdictions such as the Isle of Man, Malta and Gibraltar, a Guernsey RNUKS is able to pay benefits to non-resident members without the deduction of any tax in Guernsey, regardless of their country of residence and without reliance on any double taxation agreements. The only tax consideration for a member will be in the country of their tax residence.

In addition, Guernsey also now has the ability under its local pensions legislation to permit flexible access drawdown (FAD) for members of a Guernsey RNUKS who satisfy certain conditions; notably that they are aged 55 or above, are not currently tax resident in the UK and have not been tax resident in the UK in any of the preceding five full, complete and consecutive UK tax years.

As a result, before seeking to request a transfer out of their existing Guernsey scheme, members should carefully consider the benefits of remaining within a Guernsey RNUKS against any benefits that might be obtained by transferring to a QROPS in, say, the Isle of Man, Malta or Gibraltar.