New HMRC Guidance For Taxing Overseas Pensions

HM Revenue and Customs has tried to clarify new tax rules for overseas pensions by issuing more guidance.

Accepting the original rule change was confusing for many, the new guidance attempts to give more details about how UK tax residents with overseas pensions will pay tax on lump sums and benefits.

The changes were announced in the last Budget, but only took effect from April 6, 2017.

The small print impacts any money paid by a Qualifying Recognised Overseas Pension Scheme (QROPS) to a former expat now tax resident in Britain as well as other schemes, such as employer-financed retirement benefits schemes (EFRBS) and Section 615 pensions.

The old rules granted a 10% tax exemption which was included in the legislation to reflect the extra costs involved in setting up and running an overseas pension compared to an onshore one.

HMRC decided to scrap the exemption to bring overseas pensions in line with how tax is levied on UK schemes.

Lump sums from overseas pension

For EFRBS, the new laws will separate out contributions paid in before the start of the tax year and those paid on or after April 6. The former rules will apply to the original contributions, while the new will apply to any later contributions.

Section 615 pensions

The new rules will apply to Section 615 final salary/defined benefit pensions and defined contribution schemes.

“This will see the withdrawal of favourable tax treatment for benefits built up in a section 615 scheme on or after 6 April 2017 but the changes will allow for limited increases after that date,” says HMRC.

“The limit will be the annual amount of increase in the pension previously allowed under the scheme rules or the rate of the consumer prices index.

“Payments to a scheme solely to fund a deficit in respect of entitlement built up before 6 April 2017 will not lead to a loss of favourable tax treatment nor will they be considered additional benefit build up.”

QROPS pensions for expats

If an expat has returned to the UK, any QROPS lump sums and benefit will be taxed at the full rate to bring them into line with how UK pensions are taxed.

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