QROPS are designed for use by an individual who holds UK tax relieved pension funds but intends to retire outside of the UK. There may been unforeseen circumstances that result in the member becoming UK resident again after retirement and this article addresses the UK tax implications in these circumstances.
Our UK tax reporting obligations as an offshore insurance company
Old Mutual International Isle of Man and Old Mutual International Ireland have agreed undertakings with HM Revenue and Customs (HMRC) to report chargeable events in respect of UK resident policyholders.
For further information about chargeable events, please see our article: UK taxation of offshore investment bonds - Part I Chargeable Events.
QROPS providers are generally non-UK resident trustees, therefore there are no UK tax reporting obligations on an offshore insurance company. This is regardless of the underlying QROPS member’s residency.
Although we have no legal obligations in respect of tax reporting to HMRC, this does not necessarily mean there is no tax payable by the QROPS member. Both the trustees and the member will individually need to ascertain any tax due and make any payment due to local tax authorities.
The legislation and HMRC guidance is unclear on UK taxation in these circumstances; however, the following is our understanding.
Taxation of QROPS benefits in the hands of a UK resident member
Where withdrawals are made from an offshore investment bond held in a QROPS arrangement and paid to a UK resident, the tax payable will depend upon the type of benefit paid.
Payments in respect of pension income
HMRC have confirmed that chargeable events on the offshore bond will not apply to UK resident QROPS members, as the income would be taxed as foreign pension income. This is because income tax payable under the schedule for foreign pension income takes precedent over any income tax payable for chargeable events (section 366(3) ITTOIA 2005). We have also received HMRC confirmation that the member will be subject to income tax on 90% of the amount received.
Payments in respect of the pension commencement lump sum (PCLS)
HMRC have not been able to offer confirmation of the tax treatment of PCLS payments that are funded by a withdrawal from an offshore bond where the member is UK resident.
The issue is that section 366 (3) ITTOIA 2005 can only apply where income tax is being paid under another schedule. The PCLS is usually a tax-free amount; therefore, it potentially would be caught by the chargeable events legislation.
Careful consideration should therefore be given to whether the payment is made by partial surrender across all policies within the offshore bond or full surrender of individual policies within the bond. Please see our article: UK taxation of offshore investment bonds - Part I Chargeable Events.
There may be some scope for offsetting any tax payable on the PCLS in the jurisdiction in which the QROPS is established against the chargeable event.
PPB deemed gains for highly personalised portfolio bonds
Bonds such as Old Mutual International Isle of Man’s or Old Mutual International Ireland’s Executive Bonds would meet the definition of a personal portfolio bond due to the wide class of assets that can be held with these bonds.
Under UK tax legislation (Section 515 to 526 of Income Tax Trading and Other Income Act 2005), a further chargeable event known as a ‘deemed gain’ will apply at the end of each policy year in which the policyholder is UK resident and holds a personal portfolio bond.
It is our view that as the policyholder is a non-UK resident trustee then no income tax liability arises to the member in respect of the annual deemed gains. However, this has yet to be tested.
In view of this, the QROPS provider and UK resident members can choose to:
- Do nothing and take the view that the policyholder is non-UK resident, therefore no tax liability occurs in respect of deemed gains.
- Seek guidance from HMRC on their individual case before returning to the UK.
- If appropriate and on request from the QROPS trustees, Old Mutual International Isle of Man or Old Mutual International Ireland are able to endorse the list of assets in which the bond can invest before the end of the policy year in which the member first becomes UK resident. If the assets are restricted to those permitted within Section 520 of ITTOIA 2005, the bond will no longer meet the definition of a personal portfolio bond. This will include the need to sell all assets that do not fall within the restricted list of assets.
Taxation of QROPS benefits on the death of a UK resident member
Lump sum payment on death of a UK resident member to their beneficiaries
HMRC have not been able to offer confirmation of the tax treatment of death payments that are funded by a withdrawal from an offshore bond where the member is UK resident.
The issue is that section 366 (3) ITTOIA 2005 can only apply where income tax is being paid under another schedule. The lump sum death benefit is specifically excluded from taxation as pension income; therefore, it potentially would be caught by the chargeable events legislation.
Careful consideration should therefore be given to whether the payment is made by partial surrender across all policies within the offshore bond or full surrender of individual policies within the bond.
Member payment charges
It should also be noted that whilst there is no income tax or inheritance tax charged against the lump sum death benefit, a member payment charge of 55% would apply to the transfer value of any UK tax relieved funds.
The charge will be based on the transfer value and will not take into account any increase or decrease in the value of the fund due to investment performance.
However, if a PCLS amount or pension income has been taken from the QROPS before the death of member, then this amount will be treated as being deducted from the UK tax relieved funds first.
Therefore, the transfer value used to calculate the member payment charge will be reduced by the amount of any PCLS or pension income taken. Please see our article: UK taxation of offshore investment bonds - Part I Chargeable Events.
The member transfers £100,000 into a QROPS. 10 years later the member unexpectedly returns to the UK and draws benefits from the scheme. The fund has grown to £200,000 and the member draws 25% PCLS and £10,000 income per annum.
The member dies three years after returning to the UK when the fund is valued at £160,000.
The member payment charge of 55% would apply to £20,000 i.e. £100,000 (transfer value) minus £80,000 (withdrawals £50,000 PCLS plus 3 x £10,000).
There may be some scope for offsetting any tax payable on the lump sum death benefit in the jurisdiction in which the QROPS is established against the chargeable event.
Delaying distribution of the funds
If the administrator decides to delay distribution of the funds until at least five whole tax years after the member's death, this will have no effect on the tax charge payable as the member payment charge is assessed on the member's residency at the time of death, even if the beneficiary receiving the lump sum death benefit is non-UK resident.