RPSM14101060 - Technical Pages: Transfers: Recognised transfers from registered pension schemes: Tax position on transfer to a qualifying recognised overseas pension scheme

Tax position on transfer to a qualifying recognised overseas pension scheme

Tax relief

The transfer is not a contribution so no UK tax relief is due in respect of it. The contributions to the transferring scheme would have received tax relief when originally made to that scheme, and the transfer is merely re-locating the pension rights represented by those contributions to a different pension scheme.

Annual allowance

The transfer is treated in the same way as a transfer from a registered pension scheme to another registered pension scheme. See RPSM14101010 (of relevance only to the transferring registered pension scheme).

Lifetime Allowance

The transfer is a benefit crystallisation event for the purpose of the member's lifetime allowance. The amount crystallised is the amount of the transfer. The taking of benefits relating to the transferred amount from a qualifying recognised overseas pension scheme is not a benefit crystallisation event for the purposes of the individual's lifetime allowance. If the transfer results in the member's lifetime allowance being exceeded, the rate of tax chargeable is 25%. The 55% rate cannot apply, even though the payment in effect is a "lump sum", because it is not being paid "to the individual", so does not fall within the 55% rate charging provision.

Member payment charge

Any future payment from the overseas scheme, relating to a recognised transfer, which is a type of payment which would not have been authorised from a UK registered scheme will give rise to a member payment charge under Schedule 34 Finance Act 2004 on a resident or recently resident individual (for more details see RPSM13102110).

Inheritance tax

When a member transfers from one pension scheme (here a UK registered scheme) to another (here a QROPS) then he has the right to determine the basis upon which the new death benefits under the transferee scheme are to be paid. That “right” is property and an asset of the member’s estate in terms of s272IHTA. So when he exercises that right by electing to have the death benefits paid on discretionary trusts outside his estate then there is a loss to his estate in terms of s3(1)IHTA . That loss and the consequent chargeable transfer is largely dependent on the member’s state of health and life expectancy at the time of the transfer. If in normal health then the value will be nominal ─ he would be expected to survive to take his full retirement benefits at which time the death benefits would lapse. If in ill health then the value could be substantive given the short period of time before a purchaser in the hypothetical open market would expect the death benefits to be paid out.

In the light of section 188(5) FA2004 which applies for Schedule 36 FA purposes the transfer payment is not a ‘contribution’ after 5 April 2006 in terms of paragraph 56(2) of Schedule 36. It follows that the transitional relieving provisions under paragraphs 56-58 of Schedule 36 will apply i.e. there is full grandfathering of the IHT exemption for the pre-6 April 2006 fund on a transfer to a QROPS.