It’s of absolutely no surprise to us that HM Revenue and Customs has announced draft legislation changes to QROPS in the form of their ‘The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012’ document. When large swathes of an entire industry set out to explore the boundaries of the legislation, those who create the legislation are going to ensure those boundaries are reinforced.
In the past we’ve discussed the adverse effects that those who’ve sought out loopholes in the QROPS rules have created – from bringing down excessive tax charges on those who have unwittingly signed up to unrecognised schemes, to bringing an increasing air of suspicion to the entire industry. Now those who have exploited QROPS have brought the full attention of HMRC back to the matter in hand, and as is their way more often than not, HMRC’s reaction has been significant and potentially damaging.
The draft legislation does bring much needed clarification to some aspects of QROPS, but it also makes the schemes potentially far less unattractive for anyone wanting to move their pension abroad from April the 6th 2012 onwards. Fortunately HMRC is willing to listen to feedback about the proposed changes, and interested parties have until the end of January 2012 to comment. Hopefully the final legislation will eradicate the risk of abuse of QROPS, without eradicating the overall appeal of these schemes.
At the moment however, the draft legislation is more of a blanket crackdown on even the more favourable aspects of former legislation; aspects that have been exploited by some in the industry. Basically HMRC has become aware that some firms have been promoting QROPS as legitimate tax avoidance vehicles, and others have been assisting retirees to access their entire pensions as a lump sum.
These ‘benefits’ are not simply allowed – or as HMRC’s own statement phrases is, they are “contrary to the policy rationale”! QROPS are meant to provide an income in retirement for beneficiaries, and whilst some may legitimately offer tax benefits depending on where the QROPS is located and where the beneficiary is a tax resident, they are not tax avoidance vehicles!
The entire QROPS industry in New Zealand really raised HMRC’s suspicions. As Geraint Davies, managing director of Montfort International said: “We could see this change coming for a while. Some schemes, particularly in New Zealand, were clearly dubious and had a flagrant attitude. HMRC have reviewed these schemes and know where and what to look for.”
As part of the draft legislation there are four particularly significant proposed changes: -
- Those transferring their pensions to a QROPS will be required to sign an acknowledgment that they understand they may be subject to tax charges if QROPS rules are breached. This is likely to ensure that those considering a transfer will take best advice and work with reputable brokerages only.
- QROPS providers will be required to report to HMRC all payments made from pension funds for 10 years from the date the pension is transferred overseas. Currently this requirement only exists for the first 5 years following the QROPS holder leaving the UK. This should eradicate those QROPS that manipulate the system and pay out 100% lump sums etc.
- New conditions should mean that 70% of accumulated funds transferred would be used to provide an income in retirement – the whole purpose of any pension scheme surely!
- And finally, it is proposed that anyone with a QROPS located in a different country to the one in which they live and are tax resident will not be able to receive more tax relief than members resident in the nation where the QROPS is held.
This final proposal is probably the most controversial; as it could mean that otherwise positive, well-regulated and advantageous jurisdictions like Guernsey now lose their massive QROPS business. This is because Guernsey, for example, does not tax non-resident QROPS holders tax on their pension income, but it taxes local residents 20% on pension income.
Guernsey will either have to not tax funds for local residents, or charge non-resident QROPS holders 20%. It’s widely expected that Guernsey will be lobbying HMRC before the January 2012 deadline to see whether the draft legislation can be amended to not penalise safe and well-regulated jurisdictions.
However, because exploitation of the rules has occurred, no one can be overly surprised that HMRC is now cracking the whip and clamping down. Many in the financial services industry who set out to flout the legislation have brought this situation to bear, and they only have themselves to blame.
Unfortunately for those who have promoted the legitimate benefits of QROPS and who have assisted their clients to get the best deals, even advising against a pension transfer if it is not in a client’s best interests for example, now have to pick up the pieces and attempt to rebuild the QROPS industry from April 2012 onwards.