Proposed laws aimed at stamping out QROPS pension tax avoidance have been announced because retirement savers and advisers are manipulating current rules “in ways they are not intended to work,” says HMRC.

The draft legislation is open for consultation until January 31, 2012, with a view to starting a tougher QROPS regime with less loopholes from April 6, 2012.

This guide looks at the new rules step-by-step and how they may affect QROPS investors.

Tax recognition

The country where a QROPS is based must recognise the scheme for tax purposes.

CHANGE: This should not present any major change to any QROPS as this is already an HMRC requirement.

Extended reporting period

QROPS providers must report any payment to investors for 10 years after funds are transferred out of a UK pension scheme.

If the QROPS investor is UK resident or has been UK resident at any time during the 10 full tax years before a payment is made out of the funds transferred to the QROPS, they could be subject to UK tax rules that apply to similar payments made by UK registered pension schemes.

CHANGE: This doubles the current five year reporting period and effectively means any payment of lump sums, benefits on onward transfers to another QROPS must be reported to HMRC.

Importantly, QROPS payments are reported annually, but from April 2012, providers will have to report each payment within 60 days. Under current rules, the report could take up to 21 months to filter through to HMRC.

Acceptance of terms

A new rule that requires every QROPS investor to sign a form acknowledging they understand the tax implications of transferring a UK pension fund in to a QROPS. The form must be filed with HMRC within 30 days of the transfer.

Limit on tax-free payments

QROPS tax-free payments are limited to 70% of the fund, but some providers try to bust these limits by offering up to 100% drawdowns.

CHANGE: HMRC will impose a strict 30% cap on tax-free drawdowns – the draft legislation is not clear whether this means 30% of the fund transferred in or 30% of the fund after additional contributions and investment growth.

The inference is this means the latter – which puts some New Zealand QROPS outside the pension rules but is likely to keep Isle of Man 50c schemes in.

Tighter QROPS registration

QROPS means qualifying recognised overseas pension scheme. ‘Qualifying’ applies to the scheme meeting certain pension rules laid down by the UK government.

Providers must certify that their pension meets these rules for acceptance on the HMRC list of QROPS schemes. If a scheme is not listed, UK pension funds cannot sanction any funds transfer.

CHANGE: Providers must comply with tighter registration requirements before their QROPS is accepted by HMRC

Tax residence

QROPS were introduced to simplify pension arrangements for UK tax residents or international workers with UK pension rights who had left the UK to permanently live overseas.

In some cases, taxpayers who are still in the UK but intend to leave within six months can also set up a QROPS.

CHANGE: Tougher compliance for taxpayers who have left the UK, start a QROPS scheme and subsequently return to the UK.

Special income tax treatment for QROPS investors

A new pension tax rule that is the most controversial clause of the draft QROPS legislation.

HMRC want QROPS investors to face the same income tax rules as other taxpayers in the country where the scheme is based.

HMRC insists these countries may no longer offer pension concessions to QROPS investors. The UK government is not imposing tax rules on these countries, but ensuring QROPS investors pay the same income tax on pension benefits as any other taxpayer in that country.

Most QROPS providers pay benefits gross – without withholding income tax – on the assumption that the saver receiving the benefit will settle any tax liability in the country where they live.

One important point about a QROPS is the scheme and the investor can live in different tax jurisdictions.

The likely result is the jurisdiction hosting the QROPS will issue a certificate of tax paid to the investor, who then declares this to the tax authority in the country where they live. Tax paid is set off against tax owed so the taxpayer does not have double liability on the same income.

The problem comes for taxpayers living in a country charging income tax at 0% or a lower rate than income tax is charged in the QROPS host country, because they will have no set off tax to balance the withholding tax.

For example, Guernsey is a popular host country for QROPS providers. Pension payments to QROPS investors living outside Guernsey are paid gross, but those paid to Guernsey residents are taxed at 20%.

This puts all Guernsey QROPS outside the new rule.

Tax authorities and QROPS providers in Guernsey and other offshore centres facing a similar problem have three likely solutions:

Lobby – Try to persuade the UK government to revise or withdraw this rule

Legislate – The tax authority can amend pension rules to meet the new HMRC requirement

Withhold tax – An unfavourable option for QROPS providers because pension benefits paid gross encourages investors to shift their funds to ‘safe’ offshore jurisdictions that trade on their reliability as financial centres. The new rules give a leg up to low tax jurisdictions.

This proposal also seeks to close the door on shifting funds to other overseas pension schemes to avoid withholding tax, like a QNUPS (qualifying non-recognised UK pension) or ROPS (recognised overseas pension).

With the rapid changing of rules you need to speak to the leaders in QROPS transfers. Contact QROPS.net now for further information and we can show you how we can help you.

Tough new rules designed to reestablish a QROPS as a retirement savings plan rather than back-door access to release pension cash early.

The main change for QROPS investors is the doubling of the reporting period from five to 10 years.

From April 2012, HMRC proposes that if a QROPS investor is UK resident or has been UK resident at any time during the 10 full tax years before a payment is made out of the funds transferred to the QROPS, the individual will be subject to the UK tax rules that would apply to similar payments made by UK registered pension schemes.

If the payment made by the QROPS relates to taxable property, tax charges will apply in the same way that they would apply to a registered pension scheme. The reporting period does not apply to taxable property transaction but lasts for the life of the QROPS.

Other rules will give QROPS investors and providers stricter guidelines, including:

• Revision of QROPS qualifying conditions
• Investors must sign up to a tax promise detailing penalties if QROPS rules are broken
• Pension providers must speed up reports notifying transfers of funds

HMRC suggests that the changes have no cost implications for taxpayers, QROPS investors or providers – but the new rules will affect around 5,000 ex pats each year.

The announcement makes up part of the Finance Act 2012 and the revisions are expected to become law in April 2012.

Draft legislation posted with the announcement does not include any retrospective provisions, which means any QROPS transactions carried out under the current rules will not be affe ted by the rule change.

“The government has found that QROPS are being marketed extensively as a way of paying amounts or enabling the payment of amounts that are not allowed under UK rules, in particular 100% lump sums, once the UK tax rules no longer apply,” said an HMRC spokesman.

“The government is publishing changes to the QROPS regime for consultation on whether they achieve the intended effect. The changes are intended to make the QROPS regime operate in line with the policy intention.

“The government will continue to keep the QROPS system under review to ensure that it is used in a manner consistent with the principle for which tax relief on pensions is provided.”

Get the latest information from the leaders in QROPS transfers, contact QROPS.net today

The purposed changes will effect the reporting requirements and conditions that a QROPS scheme needs to meet to be recognised as a QROPS.

New Zealand schemes have specific amendments affecting the tax exemption clause.

The tax exemption clause is utilised by a number of jurisdictions, if the draft legislation is passed in April 2012, the exemption clause may only occur if available to both residents and non-residents of the country where the scheme is held.

After the consultation period, the draft legislation may be amended, and will be in effect from 6th April 2012

To stay up to date with the latest news and developments, contact QROPS.net today.

QROPS.net are the leaders in QROPS advice, due to our size and strength we can offer you the very best independent advice in plain English.

Demand only the best advice for your QROPS transfer, speak to us today.

The Offshore Co-Ordination Unit (OCU) is a team of offshore analysts, technical tax experts and investigators, who will co-ordinate HMRC’s compliance work to identify UK taxpayers who are suspected of hiding income and assets in offshore accounts to avoid UK tax and duties.

The unit will data mine offshore information at HMRC’s disposal, including bank account data from other countries.

The OCU will take-over HMRC’s Liechtenstein Disclosure Facility (LDF) and co-ordinate inquiries in to suspected tax cheats with secret bank accounts in Switzerland.

The LDF urges investors with undeclared tax relating to cash or assets in Liechtenstein to negotiate a settlement with HMRC.

Exchequer Secretary to the Treasury, David Gauke, said: “The days when untaxed income or capital could be safely salted away offshore, beyond the reaches of the taxman, are long gone.

“The launch of this specialist unit, together with the other valuable work the department is driving forward in an effort to tackle offshore evasion, underlines the fact that offshore tax cheats are fast running out of places to hide.”

The OCU is the first in a team of 100 new offshore investigators announced by Chief Secretary to the Treasury, Danny Alexander, in September.

HMRC has announced several high-profile tax avoidance campaigns in recent weeks, including inquiries aimed at landlords in North Wales and the North West.

The development of tax investigation teams is part of a £900 million funding programme by the Treasury to crack down on tax evasion.

Other efforts to cut tax evasion include sending tax inspectors to check the financial records of small businesses. HMRC expects to carry out 50,000 visits a year from next year.

The government has also upped penalties for late filing of tax returns.

The deal lifts the traditional veil of secrecy draped over Swiss bank accounts for decades.

Under the agreement, 500 million Swiss francs will be paid to HM Revenue and Customs as a down payment against money raised from existing accounts held by UK taxpayers at a rate of between 19% and 34% to settle past liabilities.

From 2013, a new withholding tax of 48% on investment income and 27% on gains will be levied by banks on any accounts held by UK residents in Switzerland.

The Swiss authorities will also tip off HMRC about Swiss accounts held by UK taxpayers.

The new charges will not apply to any taxpayers disclosing their financial affairs to HMRC.

George Osborne, Chancellor of the Exchequer, said: “Tax evasion is wrong at the best of times, but in economic circumstances like this it means that hard-pressed law-abiding taxpayers are forced to pay even more.

“That is why this Coalition Government made it a priority to go after those who don’t pay their fair share. We will be as tough on the richest who evade tax as on those who cheat on benefits. The days when it was easy to stash the profits of tax evasion in Switzerland are over.”

Announcing the agreement, HMRC also revealed a new international team of investigators is seeking tax cheats across the world. Dave Hartnett, Permanent Secretary for Tax at HMRC, said: “The world has changed for tax evaders. A few years ago, no one would have anticipated that we would conclude an agreement with Switzerland to tackle tax evasion. However, with the clear wish of Switzerland as well as the United Kingdom to ensure that tax is paid as it should be, we are embarking on a new course which preserves important principles for each jurisdiction, and will be fair for all UK taxpayers.

“Our strategy is working. We will secure significant sums of tax that some had thought we would never see. Not only does this agreement settle past liabilities and make arrangements to secure correct taxation in the future, it also gives HMRC more scope to find out about Swiss accounts.”

The number of criminal convictions for tax crimes has jumped by almost 40% in a 12 months as tougher laws and far-reaching agreements with other countries have turned the screw on crooks.

In the year ending March 31, HMRC obtained 140 tax evasion convictions – up 38% from 107 in the previous 12 months.

The drive to blitz tax evasion is set to step up a gear fuelled by a £900 million investment in funding.

The target is a 500% increase in convictions – taking the number each year to around 700.

HMRC’s has two-pronged approach to dig out tax cheats:

• A campaign to root out assets and income hidden in offshore bank accounts in former tax havens. Liechtenstein and Switzerland are the most recent to succumb to a combined assault from tax men in the UK, USA, Germany, France and Italy.
• New powers at home to inspect tax records of 50,000 small businesses a year to uncover undeclared income

“Tax evasion is being tackled head-on through targetted disclosure opportunities backed up by third party data and state-of-the-art IT,” said David Hartnett, the permanent secretary for tax.

“The days of using offshore tax havens to evade UK taxes are drawing to a close. The only rational option is to talk to us because this always makes more financial sense than waiting to be caught.”

A proposed change in money laundering regulations to order anyone who the tax man suspects knows about tax evasion to hand over the details to HMRC is also underway.

The move will make failing to notify HMRC of tax evasion a criminal offence.

The proposal is part of consultation launched recently to upgrade money laundering regulations.

“It’s essential that the UK is a hostile environment for money laundering and financing terrorists,” said Lord Sassoon, the Commercial Secretary.

In three non-residency appeals rejected on the same day by the Supreme Court, Lord Wilson, one of the presiding judges highlighted that PwC failed to point out that their clients could have contacted HM Revenue & Customs to discuss their residency status.

In each case, the appellants, Robert Gaines-Cooper, Robert Davies and Michael James claimed they were not liable to pay tax in the UK because they were non-resident.

The court criticised HM Revenue & Customs for giving unclear guidance to ex pats over residency, but noted an information booklet invited inquiries.

Wilson said no evidence suggested that PwC contacted HMRC, who represented all three defendants.

Another of the judges, Lord Walker suggested PwC opted to do nothing.

“The appellants had expert professional advisers, and it was well known to them that a large amount of tax was at stake,” he said. “It seems possible that the preferred strategy was to let sleeping dogs lie, despite the obscurity of parts of the guidance.”

Although the Supreme Court cases did not involve QROPS offshore pensions, they show the importance of ex pats picking the right advisers – and the problems of taking the wrong advice.

QROPS pensions are only available to UK non-residents, and the first step in assessing if a QROPS is the right retirement savings package for an ex pat is determining if they qualify as a non-resident.

The options are simple – if the ex pat is not UK-resident, then a QROPS is probably the preferred pensions route, while if they are UK resident, a SiPP is a better choice.

Failing to assess residency makes the investment decisions that follow uncertain because making the wrong choice leaves the pension investor open to fines and penalties from HMRC.

That’s why QROPS.net advisers carefully look at residency status and the interaction of tax laws in the countries where the ex pat lives and where the QROPS provider is based.

Headline’s in the financial pages have trumpeted out warnings about the tax legality of some QROPS schemes in recent weeks following action by HM Revenue and Customs and the Treasury.

Tax loopholes

The overriding point is the UK tax authorities are tightening up QROPS rules to make sure investors do not benefit from tax loopholes.

The point is that QROPS are robust pension plans for ex pats that are here to stay – the problem is a few advisers and providers are working to undermine the rules to make tax gains for a few ‘grey area’ customers.

For QROPS investors who are unsure about the status of their offshore pension scheme, now is a good time to ask a second, impartial adviser to review the scheme.

Reliable advice

For QROPS investors who have schemes dating back a few years, new solutions are cheaper to run as the offer lower charges and improved investment options.

As the leaders in QROPS advice, QROPS.net can find you the perfect solution for your pension, wherever you are in the world.

Contact QROPS.net today

Derek Hankinson, who lost the largest single tax case worth £30 million in income tax, interest and penalties, is restating his case before the Court of Appeal in London.

His legal team are arguing that HM Revenue and Customs stress test their inquiries with a stronger burden of proof – and if that’s the case, evidence that was used to against Hankinson should be inadmissible.

The case depends on the court’s interpretation of the taxman’s powers of discovery.

Generally, HMRC has to prove either that a tax inspector could not have reasonably been aware of discovery information when an inquiry is launched , or negligence or fraud was involved in submitting the original tax return.

Hankinson claims that as HMRC has tightened the rights of taxpayers, they should have a stricter burden of proof as well and instead of applying the power on the basis of ‘either…or’ it should be ‘and’.

Then, it follows the Hankinson argument is correct, any evidence wrongfully discovered after the power was wrongly applied should be set aside.

The original case, which Hankinson lost last year related to Hankinson claiming he lived overseas when earning a significant income in the UK. The court disagreed he had left the UK and found for HMRC.

Hankinson appealed based on the fact HMRC made a discovery assessment about his residency status six years after the tax year in question ended. The court did not grant leave to appeal, so he appealled that decision as well.

Many legal and tax experts have commented on the case and few believe Hankinson will win in the Court of Appeal as two experienced tax judges have already found against him.

The problem many advisors face when trying to set a client’s residence status for tax is that UK law does not define a test in statute and many of the rules are made up on the hoof by agreeing interpretations with HMRC.

The government has suggested that residence will be defined in statute, but no date or format has been released.

A judge in the High Court has set a four-week deadline for HM Revenue and Customs to present their case.

The move came after Equity Trust, a trustee of delisted Singapore QROPS provider Panthera challenged HMRC’s decision to remove the coveted QROPS pension status from the firm.

HMRC banned all Singapore QROPS in 2008 on the grounds the Panthera QROPS failed to meet the conditions of the recognised offshore pension scheme.

The two sides are arguing over a condition in QROPS rules that states a scheme must set aside 70% of the fund to provide investors with income for life and that any pension benefits must not be paid before the normal minimum pension age.

Now, HMRC must provide the court with evidence supporting the ban. Equity Trust has 14 days to respond and the judge has set the earliest available date after May 17 for a full hearing.

The judge commented the case had continued for too long and should be resolved.

Bethell Codrington, managing director of Panthera, says: “What the trustees have always aspired to do is protect the investors, and the only option open to us to try to resolve this was through the High Court.”

When a QROPS scheme is deregistered, transfers of funds in to the scheme become ‘unauthorised’ payments and attract a tax penalty of 55% of the fund value.

The Panthera Singapore QROPS was the first scheme to lose HMRC status. Since then other schemes in Hong Kong have also been banned.

HMRC and other jurisdictions are also though to be locked in negotiations over perceived QROPS infringements.

Gibraltar QROPS providers have tried to start schemes since the end of 2009 in a disagreement over tax rates for pensioners.

HMRC is monitoring the activities of  some irresponsible international firms offering ex pats advice about switching pension funds from the UK to offshore schemes.

Investigators are building evidence against schemes thought to abuse tax rules with a view to removing them from the HMRC list of registered QROPS pensions.

An HMRC spokesman confirmed the move but declined to comment about any particular schemes under investigation.

Since QROPS started in 2006, offshore pension schemes have been closed down in Singapore and Hong Kong, leaving investors facing tax penalties of 55% of the value of the pension fund transferred in to the scheme.

Further tax charges are also expected as the pension funds are no longer exempt from inheritance tax as they were within a QROPS scheme.

Recently, a couple who transferred more than £250,000 offshore to avoid tax have had to pay £86,000 in penalties after the taxman objected to the scheme, reducing their retirement savings to £145,800.

Neil and Megan Gratton were hoping to save tax and avoid buying an annuity with their pension under a scheme devised by Malcolm Tune, a financial adviser later convicted of fraud.

Regulators in Spain and Dubai are also cracking down on advisers offering dubious offshore financial advice.

The issue is not QROPS offshore pensions – the investment vehicle is robust and regulated by HMRC – but unscrupulous advisers charging high fees for strategies that break the rules and leave customers high and dry facing fines and reduced retirement savings.

The message from regulators is clear – if you transfer pension funds to a QROPS check out that your adviser and provider are regulated and are part of reputable and experienced firms who can demonstrate a track record of successful QROPS transfers.

The new penalties start from April 6 for UK residents evading income tax and capital gains tax.

The severity of the penalty – based on the amount of taxed owed – depends on the tax status of the offshore financial centre with those not sharing tax information with the UK  attracting the highest penalties.

The Treasury says the penalties are geared to make hiding cash offshore less attractive to savers and investors.

The new penalty regime is the latest stage in the The Offshore Disclosure Facility (ODF).

In 2007, the first ODF generated over £450 million  in tax, interest and penalties – with more from follow-up investigations.

The second ran last year and results are still under evaluation by HMRC.

The Liechtenstein Disclosure Facility (LDF) opened on 1 September 2009 and will run until 31 March 2015.

Four countries shamed over ‘inadequate’ tax laws

Any UK resident individuals and companies  have to disclose their taxable assets to HMRC or face having their accounts closed.

The LDF is expected to generate well over £1 billion by the time it closes.

HMRC head Dave Hartnett, Permanent Secretary for Tax,  confirmed the government is serious about tackling tax evasion offshore.

He said the new penalties will increase the deterrent against offshore non-compliance and make evading tax more difficult for most UK residents with offshore financial interests.

Meanwhile, Barbados, the Seychelles, San Marino and Trinidad and Tobago are named and shamed as countries with inadequate tax laws.

The Global Forum on Transparency and Exchange of Information for Tax purposes, hosted by the Organisation for Economic Co-operation and Development (OECD), they fall short of the international standards.

These countries would probably attract the highest tax penalties under the new HMRC rules.

The HMRC penalty shake-up affects UK resident taxpayers – including those that may have lived offshore for many years but have not severed all their financial and lifestyle ties.

HMRC has declined to comment on the inquiry and no charges have yet been made.

The arrests are thought to be the first coming from ongoing inquiries by HM Revenue and Customs in to Swiss bank account details of 3,000 British taxpayers sold to HMRC last year involving undisclosed earnings from money stashed in accounts at a Swiss branch of HSBC.

Wikileaks to name 2,000 involved in tax evasion

Wikileaks is about to blow the cover on 2,000 more wealthy individuals and corporations allegedly evading tax and laundering money running in to billions.

The organisation has already blown the whistle on thousands of leaked diplomatic cables between US embassies and Washington.

Wikileaks founder Julian Assange is embroiled in legal wrangles over sex allegations in his native Sweden and calls for prosecuting him for treason in the US.

The banking secrets come from information handed to Wikileaks by disgraced banker Rudolf Elmer faces charges of breaking Swiss bank secrecy laws, forging documents and sending threatening messages in Switzerland.

The details allegedly include the names of 40 politicians involved in tax evasion, plus high net worth individuals, corporations, and financial institutions.

Elmer alleges they were involved in systematic tax evasion by hiding behind veils of secrecy in offshore financial centres to shield their activities.

“What I am objecting to is not one particular bank, but a system of structures,” Elmer told the Observer newspaper.

“I have worked for major banks and the one thing on which I am absolutely clear is that the banks know, and the big boys know, that money is being secreted away for tax-evasion purposes, and other things such as money-laundering – although these cases involve tax evasion.

“I agree with privacy in banking for the person in the street, and legitimate activity, but in these instances privacy is being abused so that big people can get big banking organisations to service them. The normal, hard-working taxpayer is being abused also.”

Guernsey slammed for ‘lax’ attitude to money laundering

Financial regulators in Guernsey are accused of overseeing money-laundering regulations that are too lax and have been charged with cleaning up their act by the International Monetary Federation (IMF).

In 600 pages of reports, IMF inspectors backed most of the regulatory framework imposed on the Channel Island state but criticised prosecutors for not taking firms who breached laws to task.

QROPS providers in Gibraltar are maintaining a ‘wait and see’ view until the local government confirms the agreement.

Sources in Gibraltar confirm that high-level talks have taken place between HM Treasury and the Gibraltar government in recent weeks and that local amendments to pension rules are expected before Christmas that will enable QROPS providers to start trading.

“We are not accepting transfers from UK pension funds in to QROPS schemes,” said one Gibraltar provider.

“The situation is still unclear until the government confirms any tax issues are resolved. HMRC approved Gibraltar as a QROPS jurisdiction and then asked that we stop accepting transfers, which we have done.

“The risk is if we accept any transfers, a 50% tax penalty could be levied.”

The history of the dispute dates back to September 2009, when HMRC wrote to the Gibraltar government querying 0% tax rates on pension benefits for over 60’s living there.

QROPS rules state that schemes should be open to residents in the jurisdiction offering the pension on the same terms as to those living in other jurisdictions. HMRC feels this is breached by the Gibraltar pension tax rules.

Discussions to resolve the disagreement were planned for earlier this year, but the General Election and subsequent emergency budget and spending reviews led to the Treasury postponing talks.

Now, these have been held and an agreement supposedly reached although no official confirmation is available.

Meanwhile, although Gibraltar QROPS schemes have been listed on HMRC’s ‘approved’ list, no transfers have been taken because fund trustees do not want to put clients or themselves at financial risk without clear and unambiguous approval.

The next expected move is for the Gibraltar government to amend pension tax legislation in line with any agreement with the Treasury and HMRC.

However, in reality, anyone with a UK pension who is living abroad or thinking of moving abroad should consider getting one. QROPS investors are a diverse range of people who might include:

People who are going to be away from the UK for at least 5 years

This requirement is driven by a HMRC rule that QROPS investors must be non-resident for at least 5 years to enjoy the benefits of tax exemption. The rule is strictly policed and narrowly interpreted. Being non-resident may be more difficult than it sounds, as instead of totting up how many days you spend inside and outside of the country, HMRC looks at where the investor has their “centre of gravity”. This test involves a number of aspects, including looking at where the saver owns property and where their children are being educated.

The consequences of not staying outside the UK for 5 years could include a back dated tax bill and even a penalty, so it is a rule that needs to be carefully heeded.

…but not necessarily Brits

QROPS are available to members of UK pension schemes, but this does not necessarily mean that the savers who have them need to be British. In fact, QROPS are available to a wide range of nationalities. Perhaps you have been on a long work placement in London and accrued pension benefits as part of your package. In this case, it is still worth looking at a QROPS to see what tax, if any, you could save.

Anyone who opts instead for an overseas scheme in a foreign country that has not be specifically authorised runs the risk of a large tax bill (backdated to the date of the transfer) and a penalty on top of that. Add those sums together, and an unwitting investor could end up having to pay 55% of the value of their pension.

HMRC approves schemes if they are taxed and regulated as pensions in their own jurisdiction. So whilst the pension does not have to meet UK regulatory standards, it has to be recognised as a bona fide pension in its own country.

This is where investors in a scheme called The Beazley Consulting Pension Scheme in Hong Kong had a nasty shock. The scheme was given HMRC’s approval in 2007, and added to the list of overseas pension arrangements which could legitimately receive UK pension assets without attracting a charge to UK tax.

However, it later transpired that the scheme had not been set up properly as required by Hong Kong regulations. Accordingly, the scheme’s investors were told that, as participants in an unauthorised scheme, they may have to pay a hefty fine.

In previous cases, HMRC have proved to be unrelenting in their pursuit of this surcharge. However, there is a chink of hope for Beazley investors to cling to. Some commentators have reported that the scheme’s trustees have secured a concession from HMRC. It seems that Her Majesty’s inspectors may be prepared to waive the penalty, if, having looked at the transfers on a case by case basis it seems that they were made for bona fide reasons.

In real terms, it seems that HMRC will impose the penalty if the transfers were for tax avoidance purposes, and may consider waiving it if investors genuinely thought that they were providing for their retirement in a legitimate way which happened to have various tax benefits.

It remains to be seen what lenience, if any, will actually be shown.

Before 2006, expat pension savers using UK schemes could not access their pensions from outside the UK without paying at least 25% UK tax on the money. Imagine the relief they felt then when the government introduced the concept of Qualifying Recognised Overseas Pension Schemes in 2006.

QROPS providers exploited this relief and set their charges relatively high, knowing that people that transferred their pensions across were so grateful to escape the British taxman that they would pay the fees with little complaint.

Fortunately, the situation has changed. New QROPS destinations are being opened up all the time – the first Maltese QROPS was added to the HMRC’s list a few days ago. Accordingly, the growing competition in the QROPS marketplace means that QROPS savers can benefit from charges that are comparable with domestic UK schemes. Some QROPS are being offered at £500 per year, although these are likely to be off the peg schemes rather than bespoke arrangements for an individual’s specific circumstances.

Annual fees are only one aspect to take into account when you are considering what a QROPS will cost. Start up fees and charges that may be payable for transferring money in and out of the schemes should also be weighed up when an investor is trying to decide what constitutes a “good value” QROPS.

As part of a large group of advisers who place hundreds of thousands of pounds’ worth of pension investments every year, QROPS.net can often negotiate significant discounts in QROPS providers’ fees and may be privy to exclusive offers from QROPS providers. Speak to one of our advisers to see if there is a good value QROPS out there for you.

As long as you remain a non-resident for at least five years after the pension has been transferred, you can continue your expat life without looking back at the United Kingdom’s Treasury.

But have you considered what may happen to your loved ones when you die? When you are making the decision about which QROPS to choose, your adviser should take inheritance tax issues into account as part of your retirement planning.

Making the move abroad should involve a thorough audit of all of your personal finances (not just your pension), and structuring them in such a way that your worldwide inheritance tax liabilities are reduced (and hopefully eliminated).

Given that there are over a thousand QROPS on the approved HMRC list, the countries that host them have different treatment of inheritance and succession issues. Some QROPS countries do tax pensions, but others may permit your pension assets to be passed directly to your beneficiaries without any tax being paid.

While you have prepared yourself to face this slightly morbid issue, you should also consider making a will, or updating your existing will if you have already made one. Your relocation itself might trigger the need for changes, to accommodate foreign property or to take into account any new grandchildren you may have acquired since the last will you drafted!

It is particularly important for expats to have valid wills because your assets may be held internationally. By consolidating details of your wealth into a single document (or series of documents), you can make your executors’ job easier, and of course make sure that your assets are distributed in the manner that you intend.

QROPS.net takes a variety of issues into account when we assist you with your retirement planning. We can advise on the inheritance and other tax implications of QROPS and your other investments.

Look at the whole of the market

If you were shopping for a car, you would not limit yourself to one garage. Likewise, if you were looking for a piece furniture, you would not limit yourself to one furniture store. So why do hundreds of people limit themselves to tied agents when they are looking for a financial product?

Tied agents are no doubt competent and professional. But by definition, they are unable to provide advice on every single QROPS out there in the marketplace. Accordingly, by choosing to go to one for your foreign pension, you are choosing to exclude yourself from an opportunity to scour the marketplace to look for the best deal.

Some investors may be surprised to discover that their pension does not have to move to the same country as them. A QROPS can be in any country that has been approved by HMRC, so there is nothing from stopping you moving to New Zealand but sending your pension assets to Guernsey.

Think short, medium and long term

Thankfully, life expectancy is on the up. Whilst there is no shortage of people who will whinge about the cost that this presents to an ever burdened system that can barely support the people who are already retired, this should actually be a cause for celebration.

It does however mean that you need to plan for a number of phases of your retirement. Some retirees may need to take large lump sums to purchase a property in their new country. Even if you do not need to, some investors may want this option because they may wish to help out grandchildren or children financially.

Despite the furore that surrounds annuities in the media (where it is claimed that they are bad value for money), many investors will choose to purchase one because of the certainty of income that they offer. Accordingly, you and your team of advisers may wish to bear this in mind when you are choosing a QROPS.

The UK side of things

Qualifying Recognised Overseas Pension Schemes offer an exemption from UK income tax, but on certain conditions that have to be kept strictly.

First is the condition that you have to choose a scheme that has been individually approved by HMRC. It is not simply enough to choose a pension scheme in a country that has been approved to accept QROPS – the scheme itself must have been vetted to check that it has been set up, is regulated and taxed as a pension in its own jurisdiction.

HMRC keep a list on their website which gives the names of most of the approved QROPS. However, there may also be some that are not on the list due to confidentiality reasons. Your QROPS adviser should check the list before giving any advice about the schemes. Investors should note that being on the list does not mean that the scheme has been “recommended” by HMRC. It merely means that the scheme has met the regulatory criteria.

The penalty for going “off list” with your choice can be severe. HMRC have the power to impose a penalty of up to 55% of the value of your pension, which they can do even if there is no evidence that you transferred the pension fraudulently.

The second condition that investors have to meet is a residence requirement. To benefit from the UK tax exemption, investors must be non-resident for at least 5 years.

QROPS investors will be pleased to note that QROPS are also exempt from UK inheritance tax.

Overseas perspectives

What about the tax authorities in the country where the QROPS is based? The answer to this question will probably inform your decision about where to buy a QROPS. After all, tax is often a significant motivation behind an investor’s decision to get a QROPS.

If your QROPS is going to be based in a country that is different from the place where you will live, then there will be a third jurisdiction to consider.

Leaving your pension behind in the UK means that the taxman takes his chunk out of it whenever you take a payment. It may also mean that you have to pay local taxes on the payments where you are.

A QROPS on the other hand, offers an alternative to this set up. The acronym stands for Qualifying Recognised Overseas Pension Scheme, and means a pension scheme that can receive UK pension assets without attracting UK tax.

There are a couple of conditions attached, of course. Firstly, the taxpayer has to stay resident for tax purposes outside of the UK for at least 5 years following the transfer. Breaking this rule may mean having to hand a large cheque over to the taxman.

The second rule is that the QROPS must be an overseas scheme that has been approved by HMRC. Failure to abide by this one may also mean giving a large cheque to the taxman.

As long as the QROPS is on the list of schemes that HMRC has approved, it can be in a number of countries. So you are open to choose one that treats pensions favourably. You may end up paying tax on your pension payments in your country of residence, but from this perspective the tax may be no higher than what you would have paid had you been receiving them from the UK.

Perhaps the most significant tax benefit to be taken from a QROPS is the fact that they are all exempt from UK inheritance tax. Whilst you may have assumed that leaving the UK means that you leave the inheritance tax net, this is sadly not true, and many a British expat (or more accurately the loved ones they have left behind) have a come a cropper believing this.

QROPS can theoretically be chosen in countries that may allow the lawful and direct transfer of pension assets to beneficiaries without incurring any local taxes either.

What is a QROPS?

First and foremost, what is a QROPS? QROPS stands for Qualifying Recognised Overseas Pension Scheme. They were introduced by HMRC so that members of UK pension schemes who were no longer resident in the United Kingdom for tax purposes could take their UK pensions overseas without incurring a tax charge.

Is there much choice?

There are over a thousand QROPS to choose from. The schemes are offered by a number of recognised financial services providers.

QROPS do not have to be based in the same country as the expat who is looking for one, which means that an investor can choose from a variety of jurisdictions that offer them. Accordingly, your QROPS could be on the other side of the world from you, if one is available in a jurisdiction you like the look of.

Is there a catch?

There is no catch, but there are rules that have to be adhered to strictly – otherwise you may risk a large tax bill and possibly a penalty if HMRC suspect that there was any skulduggery involved.

The first rule is that the QROPS must be one that HMRC have vetted. Whilst they do not recommend schemes, they do check over the details of individual arrangements to make sure that they are taxed and regulated as pensions in their own countries.

The second but no less important rule is that the expat concerned must reside outside of the United Kingdom for at least five years after their pension has been transferred. If you do not plan to be away from Britain for as long as that, you may wish to consider an alternative investment vehicle. However, if your plans to emigrate are long term, a QROPS may be ideal.

The Panthera ROSIIP pension fund was formerly granted status as a Qualifying Recognised Overseas Pension Scheme, which meant that it was authorised by Her Majesty’s Revenue and Customs to receive UK pension assets free from UK income tax.

However, following an investigation into the way in which the Singaporean scheme was run, it was stripped of its QROPS status. It was widely reported that HMRC were concerned that the scheme was permitting unauthorised asset classes and allowing investors assets to larger cash lump sums that the QROPS system was designed for.

Under the QROPS rules, an authorised foreign pension scheme must be regulated and taxed as a pension in its own jurisdiction. Those requirements do not have to be carried out in the same manner that the UK system treats its own pension schemes, so investors have a wide range of different jurisdictions to choose from among the 1,000 or so QROPS that are on the HMRC’s permitted list.

Choosing a scheme that has not been authorised by HMRC, or continuing to have assets invested in an unauthorised scheme means that the investor risks facing a penalty tax bill at a rate of up to 55%.

HMRC struck the Singaporean QROPS off their list some time ago, and Panthera have been keen to get themselves restored to it.

However, HMRC are reported to have been less than keen to listen to their protestations. The current ruling was under a pre-action protocol in the English courts, where HMRC tried to strike out Panthera’s challenge to their ban on acting as a QROPS.

Now that the High Court has ruled that Panthera’s case can be heard, the fight between Equity Trust (Singapore) and HMRC can well and truly start.

This is not the case with QROPS. If you have a UK pension and have left or are thinking of leaving the United Kingdom, a QROPS is well worth a look.

The thing that attracts most people to QROPS is the fact that they are exempt from UK income tax. Accordingly, British expats can release their pension assets from the UK without making a substantial donation to the Treasury of a country where they no longer live.

Another tax advantage of QROPS is their exemption from inheritance tax. It has recently been confirmed by HMRC that assets that have been transferred into a Qualifying Recognised Overseas Pension Scheme are exempt from IHT from the moment that the transfer takes effect – which has a considerable advantage over other IHT saving schemes because they may typically take seven years to take effect.

However, a significant advantage of getting a QROPS over leaving your pension at home is the choice of schemes at your disposal.

Given that you have over 1,000 QROPS to pick from, there is a scheme out there for every investor. Do you need to get your hands on a lump sum quickly? If so, there will be a QROPS that will allow it. Do you have a particular asset that you want to carry across to your foreign scheme? If so, as long as it is not residential property, you will be able to find a scheme that can accommodate you.

Even if there is not a QROPS out there that matches your requirements exactly, you can create one around your own needs. While the fees may be slightly higher than for an off the peg solution, this option gives you the comfort and the convenience of designing your pension scheme around your individual future plans.

However, getting a QROPS does not mean that you escape HMRC’s notice completely. After all, for the first 5 years following the transfer, your QROPS administrators will have to report back on what goes on with the scheme. When those 5 years have elapsed, HMRC has no right to be notified of any gains or losses your pension scheme makes.  

A Qualifying Recognised Overseas Pension Scheme is only capable of attracting the tax exemption if it has been approved by HMRC themselves. This means that HMRC will have examined the plans and proposals of the QROPS provider and deemed that it is taxed and regulated as a pension in its own country.

This “approval” does not mean that HMRC recommend any particular product, or indeed that they endorse that it would be a good idea to transfer your UK pension to it. QROPS are typically mentioned on a list that is kept on the HMRC website. Some confidential ones are available, but these are typically not open to members of the general public.

If your QROPS should for some reason fall foul of the QROPS rules (e.g. by misinterpreting them in some way), the QROPS may lose its HMRC approval. In this case, the UK tax exemption may be at risk, and advice from a specialist QROPS adviser needs to be sought as soon as possible.

When you get your QROPS, your QROPS adviser should tell you all about the potential tax liabilities is brings. Accordingly, you may have to fill in returns in the country in which the QROPS is based and the country in which you live, if different.

At first glance, this may seem odd. After all, you live where you live, don’t you? But tax authorities may have a strange definition of “residence” and failure to abide by their rules could cost you dearly.

It used to be the case that HMRC in the United Kingdom looked at the number of days you stayed in the UK per year. In some circumstances, they would even have looked at the total number of days you stayed their over a three year period. The “limit” for being considered a resident for tax purposes was around 90 days. Rather than being the preserve of superrich jet setters, this was dangerously easy to achieve for normal expats. A long Christmas stay and a summer tour to visit friends could soon add up.

However, since the Gaines-Cooper case which did, as it happens, involve a superrich person, the rules have changed. The taxman can now look at where your “centre of gravity” is.

This is a spectacular example of how HMRC can move the goalposts, without actually telling anyone where they have put them. The case itself may not offer much help. Few expats may have lives that  match up with Mr Gaines-Cooper’s, so comparing the facts of the case and your own circumstances may not offer much help.

Instead, you may wish to seek professional advice on the issue. Clues to what may lead to HMRC deciding that your “centre of gravity” is in the United Kingdom include having a spouse who lives there, and educating your children in Britain. Keeping valuable property and antiques may also be clues. However, rather than relying on clues, ask your financial adviser for their opinion on the issue. It’s better to be safe than sorry about a large tax bill!

After talks between Treasury officials and Gibraltar Chief Minister Peter Caruana, the self-governing British territory, QROPS.net understands a behind-the-scenes agreement has been made between the two countries.

The result is that sometime during 2010, Gibraltar will amend tax law relating to 0% income tax on pensions for the over 60′s in the territory in line with HMRC Qualifying Recognised Overseas Pension Schemes (QROPS) rules.

Tax change is a climb down for pension funds

An official involved in the talks has been quoted as saying: “An agreement has been reached that resolves the issue, to the satisfaction of the industry in Gibraltar and the government in Gibraltar, as well as the UK Treasury,”

No further details are available and neither side is making any official comment at this stage.

However, a tax law amendment in Gibraltar is a climb down for pension administrators who have spent months in negotiation with HMRC and threatened to take legal action against the UK if the taxman refused to recognize the country’s tax rules.

QROPS pensions vital in retirement planning toolkit

The row about taxation had been rumbling on for some months, with

Gibraltar’s Association of Pension Fund Administrators  (APFA) stopping transfers from UK pension funds to QROPS in September.

APFA said the argument is over a 0% income tax charge on pension income for the over 60s.

HMRC said that pension income from QROPS schemes must be taxed and that a 0% rate is not a tax.

APFA argued that 0% is a tax – similar to zero rate VAT in the UK and 0% corporation tax on the Isle of Man.

Retaining QROPS status is important for Gibraltar as the territory attempts to build an offshore finance centre to rival the Channel Islands and the Isle of Man.

Without offering QROPS pension schemes, Gibraltar would be missing a big component from the offshore financial advice toolkit for retirement planning.

So here’s the inside information direct from HM Revenue and Customs on how to save tax on your pension benefits if you are a higher rate tax payer:

Who qualifies?

Any UK non-resident with UK pension rights who lives on the Isle of Man, Guernsey or Jersey.  Non-resident excludes anyone with dual nationality with the UK.

How do they make a tax saving?

The background is the UK and these three tax havens have negotiated new tax treaties during 2009 that mean anyone living on the islands paying UK tax at 40% and receiving UK pension benefits can apply to have their pensions paid without UK tax deducted rather than with tax deducted at 40% at source.

For Isle of Man, the option has been available since April 6, 2009, and for Jersey and Guernsey starts from April 6, 2010.

This means that expat retirees in these countries can opt to pay tax where they live instead of in the UK.

How much can they save?

From April 6, 2010, anyone earning over £150,000 loses their personal tax allowance and pays income tax at 50%.  If anyone in this position opted to take their pension gross instead of net of tax from the UK, their income tax would be:

• § Isle of Man – 18% – saving 22% taxes this year and up to 32% next
• § Jersey and Guernsey – 20% – saving between 20% and 30% income tax next year

What the taxman says

An HMRC spokesman told QROPS.net: “This is accurate. The UK will only exempt the pension payment from tax if the individual is resident in Jersey, Guernsey or the Isle of Man and also not resident in the UK for tax purposes, which means dual residents will not benefit.”

A QROPS is an even better tax saving solution

If you are UK non resident anywhere in the world including Jersey, Guernsey and the Isle of Man, and have UK pension rights but have not yet bought an annuity with your pension, you gain even more tax advantages by transferring your UK pension to a QROPs.

A QROPS negates any obligation to buy an annuity and allows your fund to be passed on when you die without inheritance tax problems.

A QROPS also pays benefits gross in many major currencies, so scheme members do not have to account for exchange control fluctuations.

The current offshore amnesty was due to end on Monday (November 30) and anyone earning interest on offshore cash that they have failed to disclose to HM Revenue and Customs faces tax penalties.

Now, the deadline is extended to January 4, 2010 with any outstanding tax payments due by March 12.

HMRC has details of 100,000 offshore accounts

HMRC had threatened preferential terms will not continue after that date.

An HMRC spokesman said: “The reason we have extended the deadline is to allow more time for banks to write to their customers. This is what they have told us they need.”

The New Disclosure Opportunity amnesty started on September 1, and under the amnesty, individuals with offshore accounts must pay all outstanding taxes and duties, interest and penalties plus a 10% penalty of the unpaid amount.

Account holders who do not come forward may be liable for 100% of the tax due as a penalty and could face a criminal investigation for tax evasion.

HMRC is seeking details of 100,000 accounts with around 20,000 having hidden assets. Over 300 banks and financial companies have handed over details about their customers’ accounts.

Amnesty take up may be disappointing

The Daily Telegraph reports that about 20 institutions are still refusing to co operate with HMRC demands for customer details and are appealing against having to surrender the information.

Figures from the TUC suggest that the UK economy loses £4 billion in uncollected tax a year through offshore tax havens.

The NDO is the second similar amnesty offered in the UK, but HMRC says that it will be the last.

The initial disclosure regime, which closed in 2007, raised £400m for the Treasury after 45,000 savers came forward.

However this time, it is rumoured the take up has been small – for example perhaps just 27 people with assets in Liechtenstein, that is part of another tax amnesty.

STM Group, a leading provider of Gibraltar QROPS pension schemes, has published interim results for the first half of 2009,  with chief executive Tim Revill stating the company’s Gibraltar QROPS business is frozen because HM Revenue and Customs has ‘de-classified’ Gibraltar as a recognised jurisdiction to accept UK pension transfers.

However, HMRC  has refused to comment.

Further clarification about Tim Revill’s comment has been sought from STM Group, but no response has been received from the company either.

The interim results included the statement by Tim Revill that said: “STM Pensions division, based in Gibraltar, from a standing start is making very good progress in the local market.

“However, its premium service, QROPS (the transfer of UK pension funds overseas), for which we had received a high number of instructions during the first half of 2009, has been temporarily frozen, due to a recent de-classification by HMRC of Gibraltar as a recognised jurisdiction.

“The local pensions industry (led by STM) is vigorously contesting this technical matter, but STM Pensions is also taking parallel steps to unblock this valuable client stream. HMRC’s actions could not have been envisaged and their actions will, unfortunately, impact the division’s full year performance.”

This statement is dated September 8 – so comes after the publication of the latest HMRC QROPS provider list on September 4 that includes several Gibraltar QROPS providers – including three entries for the STM GROUP.

Recently, Gibraltar QROPS providers formed a trade organisation to discuss alleged QROPS irregularities with HMRC.

Currently QROPS.net feel we cannot advise our clients to invest in Gibraltar QROPS because of uncertainty in the market following the statement from STM Group and the refusal of HMRC to confirm the jurisdiction status.

Pension administrators are in talks with UK tax authorities about Gibraltar’s controversial 0% income tax for the over 60′s and are accusing rival pension companies in Guernsey of spreading rumours that Gibraltar is about to dropped as an ‘allowed’ place to transfer UK pensions.

Removal from the list would mean that no UK pension provider would allow pension transfers to a Gibraltar based scheme, effectively cutting the country out of the market.

Gibraltar companies STM Fidecs and Castle Trust have set up an Association of Pension Fund Administrators (APFA) to counter the bad PR and to formulate the jurisdiction’s QROPS products. They are locked in talks with HMRC about the nitty gritty of the terms and conditions that their QROPS products need to meet to retain HMRC  ‘allowed’ status.

APFA chairman David Erhardt said: “We think that we have fulfilled all the necessary requirements and are hoping the scheme gets the go-ahead soon. Gibraltar needs this to be resolved to avoid any kind of confusion. The bad publicity we could receive from being taken off the QROPS list would be disastrous, just as it was when it happened to Singapore.

“Gibraltar as a jurisdiction needs to ensure that this is resolved to retain the right of Gibraltarians to transfer their UK pension funds. It is really a case of ensuring that we do not get an unjustified bad global reputation.”

Tax

The issue that is causing the delay is that Gibraltar taxes income for the over 60′s at 0%. HMRC wants another band of income tax introduced that would catch higher income earners.

The Gibraltar QROPS scheme will also have a maximum 25% fund drawdown – that would allow the product to compete with those offered by Isle of Man pension providers. Currently, the Isle of Man is the only pension provider to allow a 30% QROPS drawdown.

APFA secretary, Jane Caulfield, believes that a lack of an agreement could have a negative impact: “If Gibraltar cannot accept QROPS, people could easily transfer their overseas pension funds to places like Guernsey. That is why we have received no help from other jurisdictions as it would be in their best interests for us to be out of the picture.”

If you have any question please contact us

The list contains all the Qrops schemes around the world that have opted to have their scheme name entered into the index. Please remember that HMRC have issued a disclaimer that waivers any responsibility of how the scheme operates etc. So do not use the list as a recommendation of a particular provider. Professional regulated advice is always first priority.

The list should be used to confirm that a scheme that is advised is still on the list and is official

Visit HMRC website to download.

A scheme may be removed from being a QROPS if HMRC decides that there has been failure to comply with any information requirements, and that inappropriate transfers have taken place.

A failure will be significant if a substantial amount of information has not been provided or if the failure to provide information is likely to result in serious prejudice to the assessment or collection of tax.

HMRC notify the scheme manager that the scheme has been excluded. The scheme manager can appeal to the General Commissioners of Income Tax against an exclusion decision. Panthera Qrops (a Singapore Qrops scheme) have launched a number of appeals to no avail. It appears that HMRC have made Singapore an example to other jurisdictions & schemes.

So to summarise, even if the Qrops is present on the “list” at this time, this does not remove the risk of that scheme being removed if that scheme is abusing the HMRC rules. It has been reported that members of the Panthera Schemes are being levied a tax bill for up to 85%!

QROPS.net is a regulated service giving you the most secure sound professional advice available. To find out more about us, and how we can help you, contact QROPS.net tdoay.

Experts believe that the selling of “pensionbusting” promises, by unregulated advisers was the downfall of QROPS in Singapore. With little or no regulation of advisers in many worldwide locations, there is clearly a risk of abuse.

It is very important for UK expats to seek advice from regulated companies & advisers such as QROPS.net advisers. We urge all individuals to do a simple background check on all financial advisers and ask them to provide a regulatory number from the governing body before you proceed.

To find out more about QROPS.net advisers and how we have the highest regulation standards, please contact a QROPS adviser