When you get a Qualifying Recognised Overseas Pension Scheme, the main attraction is tax.
Introduced in 2006, QROPS enable members of UK pension schemes to transfer their pension assets to schemes outside of the UK without paying British income tax.
At first glance, the system seems too good to be true. However, the QROPS scheme is tightly regulated, with rules that must be adhered to strictly.
Must be a proper QROPS
The first rule is that a QROPS is only a QROPS if it has been examined and considered to be a QROPS by Her Majesty’s Revenue and Customs. QROPS are only judged to be such if the foreign scheme is regulated and taxed as a pension in its own country. This does not mean that the schemes must be taxed as heavily as UK pensions – merely that the overseas jurisdiction in which a QROPS finds itself must be treated as a pension in its own country.
Transferring your UK pension into a scheme that has not been adjudicated to be a QROPS is dangerous because it may attract a penalty and back taxes when HMRC find out.
Five year rule
The next rule that needs to be born in mind is the five year rule put simply, QROPS investors must be resident for tax purposes outside of the UK for at least five tax years from the date that their pension is transferred in order to benefit from the tax exemption.
Tax residency has become more difficult to determine following the court case of Mr Gaines-Cooper, who was considered UK resident for tax purposes because his wife lived in the UK, and his child was being educated there. This was held to be the case despite the fact that he was outside of the UK for at least nine months of the year.
If you have any concerns about your residency status, it is best to seek professional advice at the earliest possible moment, because getting it wrong can be very costly indeed.
