Whilst Covid-19 has affected just about everybody on a micro level, there is also a macro level overlay, with internationally mobile individuals needing to test their financial plans for robustness more-so than those anchored in one place. Every UK financial adviser will have one or more clients living or working overseas, and many others who had plans, pre Covid, to move overseas, to enjoy their retirement. International advisers invariably are dealing with clients all over the world, and today Quilter International does business with advisers and their clients in 40 countries, and given global mobility and 35 years’ heritage, have clients now likely to be in more than 100 countries.
Unsurprisingly, there has been a surfeit of questions from advisers and their clients whose mobility has been restricted, and who have been forced or are thinking of an earlier return than planned, because of employment considerations, travel restrictions, family needs or general welfare concerns.
I’d like to comment on three areas:
- Personal taxation of UK pensions for early returners
- The viability of overseas pensions when UK tax resident
- Lifetime Allowance considerations
1. Personal taxation for UK pensions for early returners
UK tax residency since 2013 has been determined by the Statutory Residence Test (SRT), which is a day-count and connections test. Every tax year one is defined as tax resident or not, and many expatriates carefully count any days spent in the UK for fear of falling on the wrong side of the test. Some have not needed to, because of clear intent to remain overseas for predetermined periods of time such as work contracts, which may now be challenged. Every midnight spent in the UK is counted as a ‘day’ for the purpose of the test, with several ‘exceptional circumstances’ excluded, namely days in transit, bereavement and serious illness.
However, guidance in March, stimulated specifically by Covid-19, confirms that up to 60 days spent in the United Kingdom can be disregarded for the SRT if an individual is:
– quarantined or advised by a health professional or public health guidance to self-isolate in the United Kingdom as a result of the virus
– officially advised by the Government not to travel from the United Kingdom as a result of the virus
– unable to leave the United Kingdom as a result of the closure of international borders, or
– is asked by their employer to return to the United Kingdom temporarily as a result of the virus.
Arrivers need also beware of the’ split year’, where in five specific cases (related to having a home and work) a year where one is considered tax resident is in fact split in to two parts, non-resident followed by resident. According to where one returns from and any Double Tax Agreement (DTA), the post-tax difference on a pension benefit could be up to 45%.
Further, temporary non-residence rules exist to ensure that where an individual is non-resident for a short period, certain income and gains are chargeable upon their return, resulting in UK tax being delayed rather than mitigated. Pension income needs to be considered here, but with its own rules. Here, any available Pension Commencement Lump Sum (PCLS), and additionally up to £100k of pension income received within a period of temporary non-residence, can be taken without being taxed upon return. The temporary non-residence rules apply to income if both:
– you return to the UK within five years of moving abroad (or five full tax years if you left the UK before 6 April 2013)
– you were a UK resident in at least four of the seven tax years before you moved abroad.
2. The viability of overseas pensions when UK tax resident
Since 2006, Qualifying Recognised Overseas Pension Schemes, known as QROPS, have been extensively used by expatriates, foreign nationals having worked in the UK and on occasion by UK residents with no intentions of expatriating. Because of the discrepancies in taxation between UK registered schemes and QROPS, in 2017 legislation broadly put them in line, so that a UK tax resident would be taxable on all pension income rather than 90%, the position before that date.
The ability for a UK resident to transfer to a QROPS (i.e. a transfer to an overseas scheme without there being an unauthorised payment) isn’t prevented by legislation, and there is certainly no
compulsion for returners to exit one. Key considerations include the location of the overseas scheme, given, for example, Malta offers a version of flexi access drawdown (FAD), whereas Gibraltar does not. Though Guernsey isn’t a convenient location for new transfers, an existing scheme there can be transferred into a similar looking arrangement, which does offer FAD, but at the expense of becoming subject to UK inheritance tax (IHT). The devil, as ever, is in the detail.
The ‘overseas transfer charge’ affecting pension transfers, requested from 9 March 2017, rendered transferring for some individuals in certain countries or to schemes in others uneconomic, has meant that since then most transferees have been within the European Economic Area (EEA). With the UK effectively leaving the EEA at the end of January this year, on 3 February, HMRC updated its Pensions Tax Manual, making it clear that the for the purpose of the overseas transfer charge (OTC) the UK and Gibraltar are both considered EEA states. This should give comfort to those returning to the UK at least in the transition period, having transferred without the overseas transfer charge (OTC) applying, who would otherwise have been caught by a charge on an ‘onward transfer’ within up to a day short of 6 years. That said the position after the transition period ends is unclear.
Old hands won’t forget extra statutory concession ESC A 10 which allowed unapproved foreign pension schemes, until 2011, to pay unlimited lump sums free of UK income tax to employees who had worked outside the UK in a generous set of circumstances. Though again modified in 2017, ‘foreign service relief’ may still offer relief from taxation, but in a less generous set of circumstances.
3. Lifetime Allowance considerations
Transferees to a QROPS are subject to a Benefit Crystallisation Event (BCE8) before the age of 75. If a transfer to a QROPS is subject to the OTC, the amount crystallising is calculated as if the charge did not arise on the transfer, and once any lifetime allowance tax charge is deducted from the transfer the OTC is then calculated on the remaining about. The tax rates for both are 25%. After BCE8, there is no further test at 75, or death, even for a UK tax resident, so returning to the UK and retaining a QROPS, could prove a reasonable course of action from a Lifetime Allowance (LTA) perspective. If the OTC was chargeable where it wouldn’t have been if the member had been in EEA, returning to the UK it would appear possible within certain timescales for the OTC to be reclaimed. There are various scenarios that have to be considered, not least the order in which you move a pension or return in person to the UK, which can make a difference in some circumstances. A clear understand of the rules is extremely important.
Upon their return, others may for their own reasons, such as scheme locations and rules, consider a UK registered scheme a sensible choice for their overseas retirement arrangements to be transferred to. Care is required here, if you transfer from an overseas scheme to a UK scheme sooner or later those pension rights will use up some of your LTA. If the transfer is from a Recognised Overseas Pension Scheme (ROPS) or QROPS you may apply for an LTA enhancement which broadly increases your LTA to cover the transfer in, but if it isn’t a ROPS or QROPS you won’t get this enhancement. To claim this enhancement you must do so no later than five years after 31 January following the tax year in which the transfer payment was made and it’s the member’s responsibility to ensure that they apply.
Timing one’s return to the UK with the SRT in mind is difficult enough, without the complexity of interplay between two countries, not to mention pension legislation, and now the unknown mobility implications materialising through the current epidemic.
The information provided in this article is not intended to offer advice and is for financial advisers only.
It is based on Quilter International’s interpretation of the relevant law and is correct at the date this article was published. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article