Trustees and pensions administrators should revise their transfer processes following an announcement in the UK Spring Budget designed to “tackle abuse of foreign pension schemes”.

What’s the issue?

In summary, where a member makes a formal request to transfer pension funds to an overseas pension plan the transfer will be an authorised payment provided that the overseas plan satisfies HMRC’s requirements – such pension plans are known as Qualifying Recognised Overseas Pension Schemes (QROPS). On and after 9 March 2017 transfers to a QROPS will be subject to a new tax charge of 25% unless an exemption applies.

The list of exemptions can be found in HMRC’s guidance and include circumstances such as: the member is resident in the same country as the QROPS receiving the transfer; the member is transferring to his employer’s occupational pension plan; the member resides in the EEA and the QROPS is in another EEA country.

Note that this is a new “special” tax for which the member and the trustees are jointly and severally liable. The trustees (or in reality, the pensions administrators on behalf of the trustees) should deduct the tax before making the transfer and pay it over to HMRC. This new tax should not to be confused with the charges that relate to unauthorised payments and associated scheme sanction charges – these still apply where the transfer is not to a QROPS.

Update transfer processes

In practical terms this means that trustees should ensure that their transfer processes are updated to reflect the new requirements, including:

• Ensuring that sufficient information is gathered from the member to be able to check whether a tax charge should apply or whether the transfer falls under one of the exemptions. If the member does not provide the necessary information, then the tax charge must be applied.

• Verifying that the overseas scheme is on HMRCs list of Recognised Overseas Pension Schemes within 24 hours of the transfer being made (more on this below).

• Deducting the 25% tax charge where this is due and paying it to HMRC.

• Providing to the member, the manager of the overseas plan, and HMRC details of the transfer and whether the overseas transfer charge applies. Taxable transfers also need to be reported on the Accounting for Tax Return.

Undertakings from overseas arrangements

In order to remain on HMRC’s list of Recognised Overseas Pension Schemes the manager of the QROPS must provide an undertaking to HMRC that the pension plan will operate the new overseas transfer charge and pay this to HMRC when due. Existing QROPS will be deemed to meet this qualifying requirement until 13 April 2017 – after this date if the required undertaking has not been provided the pension plan will automatically cease to be a QROPS on 14 April 2017. HMRC plans to suspend its list of Recognised Overseas Pension Schemes from 14 April and publish an updated list on 18 April.

It is worth noting that the tax charge can also apply to subsequent transfers from one QROPS to another but this is dependent on the member’s circumstances and it does not involve the UK pension plan once the original transfer has been discharged.

The truth, the whole truth, and nothing but the truth

There is always a possibility that members may be economical with the truth in an attempt to avoid a tax charge. Therefore, if trustees execute the transfer in good faith, having conducted the necessary due diligence, and it subsequently transpires that they have been misled into believing that no tax was payable, they can apply to HMRC to be discharged from their liability.