HMRC clamps down on Qrops abuse with tighter rules

The draft regulations introduce four conditions that a scheme must satisfy to be and to remain as a QROPS. It is the second and the fourth of these conditions that introduce the key changes.

The new conditions have the effect of :

1.Putting to an end with effect from 6 April 2012 the ability of long term non UK residents to transfer their pension fund to New Zealand and receive a lump sum of 100% of the fund.

This change introduces certainty of timing, as this was in effect already the subject of legislation passing through the New Zealand Parliament.

2. Introducing a new and unexpected provision (Condition 4) that requires uniformity of tax treatment of benefits for local and non local residents. Using HMRCs words :

“If the country’s tax regime does not meet these conditions then schemes based in that country will not be able to be a recognised overseas pension scheme.

Looking at the system of personal income taxation of scheme benefits in the country where the scheme is established and ignoring any double taxation agreement rules, one of the following statements must be true:

1. There is no exemption from tax in respect of benefits paid to both resident and non resident members.

2. There is exemption from tax for non resident members and it also applies to resident members, regardless of whether the member is resident when they join the scheme or at any other time while they are a member. ‘

Ironically New Zealand pension schemes satisfy Condition 4 as there is no tax relief on pension contributions made by local residents, the fund is taxed, and there is no tax on benefits when paid out. No tax applies either on benefits made to non residents of New Zealand so “there is exemption from tax for non resident members and it also applies to resident members”.

This however would seem not to be the case with regard to Guernsey and the Isle of Man ( Section 50C schemes in particular) where pension schemes differentiate in terms the of tax treatment of benefits between local residents and non residents. So as local residents would be taxed on benefits and non local residents are not taxed on benefits condition 4 under the draft regulations are not satisfied.

This is therefore a huge issue for Guernsey as unless condition 4 is revised or Guernsey law changes no Guernsey scheeme will qualify as a QROPS after 5 April 2012.

Stephen

As would be expected you know rather more about this subject than Will!

The draft explanatory note highlights what we all knew; namely that HMRC have been monitoring QROPS and wish them to be used primarily to allow people emigrating to take their pensions with them. The New Zealand 'cash out' option was always going to be stopped and certain advisers will be particularly pleased that there is no retrospection. Instead we actually have a 'buy now while stocks last' scenario.

I imagine that Guernsey in particular will lobby against the other major change, but HMRC will have known that when they drafted the regs.

Don't be fooled into believing that there will be no retrospective action. HMRC never approved any QROPS, and as such, reserve the right to take any action they like from 2006 onwards.

Stephen

Thanks for you contribution, which I shall cut and paste into a reference document for my files. An excellent precis.

if HMRC wants to toughen up, they should clamp down on the so called "Offshore IFA" cowboy outfits like de Vere and Partners that operate outside of the FSAs reach.

The ‘Proposed’ New Rules will, in reality, only affect those 'Overseas Pension Schemes' that didn't qualify, from HMRC's perspective, in the first place.

I think it is possible that, if you look at the detail of these ‘Proposals’ and the ‘Existing Rules’, these are not New Rules anyway.

They are just clarifying what rules are already in existence.

If you look at the existing HMRC / QROPS rules, certain popular jurisdictions have never qualified, even though they are 'Recognised' by HMRC.

There is NO such thing as an ‘Approved QROPS’ or even an ‘Authorised QROPS’.

They are just ‘Recognised’ and they will only retain their status as long as they obey the rules set out by HMRC.

I am not sure what this will mean for the Isle of Man, Guernsey and Jersey (If they decide to go into the QROPS Market Place for Non Residents).

These three, along with many other jurisdictions, will need to amend a lot of their rules (Internal and External) to be able to retain QROPS Qualification which, in reality, they do not currently have.

I doubt whether they will do this as the fallout from these changes will be worse for the ‘Locals’ and those people that are not involved in QROPS.

It's funny that most of the noise being made about these 'Proposed Changes' is from Advisers and Countries that are going to lose out even though they never qualified in the first place.

Looks like that the EU route (Subject to some Ts & Cs) is the only one that has any legs especially as there will be, as there always has been, three categories of which Category 2 will be difficult and Category 3 will not work.

Just in case it is not obvious, the EU route is in Category 1!!!!

Interesting Times.

I am not going to correct here the many misconceptions in what John has posted here - with one exception.

It matters not one iota whether a scheme is or is not in the EU. It may well still be affected by new condition 4.

Wherever it is located the scheme under the draft regs must have a uniform tax treatment of benefits applicable to residents of the place where the QROPS is located and those who are resident elsewhere.

Stephen

The point I was trying to make (obviously badly), in simple terms, was that, assuming all things being equal, a Pension Scheme that is in the EU and that meets all of the requirements, of which some do not for various reasons, will, in general terms, have a head start over a Pension Scheme that is not in the EU and is in a country that has no Pensions Regulator and / or does not regulate the Pension Scheme in Question.

I agree with your comments that Guernsey and the Isle of Man will have a problem after April 2012, assuming that they don't already have one today especially in relation to the 70% rule which may mean that some people are unable and / or not allowed to take Tax Free Cash on the basis that their funds have fallen to 70% (or below) of the amount that was transferred from the UK which created the Benefit Crystallisation Event.

The changes to the QROPS rules does not surprise and I do consider further changes to come like the 5 year rule being extended.