Expats told to consider Qrops to limit tax charge

Expats told to consider Qrops to limit tax charge

Wealthy individuals risk a 55 per cent tax charge if their pension funds breach the lifetime allowance but expatriates can limit this exposure, according to financial planners Blevins Franks.

Jason Porter, director of Blevins Franks, suggested expatriates who are likely to go over the current £1.055m lifetime allowance could avoid punitive tax charges by transferring their UK pension funds to a Qualifying Recognised Overseas Pension Scheme. 

As well as limiting exposure to tax penalties, a Qrops can provide currency flexibility and estate planning advantages, the firm stated. But there are also drawbacks.

Mr Porter said: "If you transfer one or more UK pensions into a Qrops and your total benefits are under £1.055m, you will not face lifetime allowance taxes on the transfer.

"However, make sure the Qrops is within the European Economic Area (EEA), such as Malta, otherwise you would still lose 25 per cent through the overseas transfer charge."

However, Andrew Tully, technical director at Canada Life, has warned that Qrops can be confusing so getting professional advice is essential.

He said: "Overseas pension transfers are a complex area, and a key target for pension scams. These transfers are not likely to be the most suitable option for most people so great care is required, and taking expert regulated advice is essential."

The 25 per cent tax charge occurs on transfers to a Qrops. It was introduced as a way to stop people from exploiting tax loopholes when transferring pension funds out of the UK to avoid UK tax.

But scheme members can claim back this charge if circumstances have changed and they are now exempt, for example, if the person transferring the funds becomes a tax resident in the same country that the Qrops is based in.

"If the transfer is not liable to the overseas transfer charge at the point of transfer, UK tax charges will apply if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer, ie you can’t just ‘bounce’ through a EEA country en route to further afield," said Mr Tully.

Individuals that are already over the lifetime allowance would incur an immediate 25 per cent charge but these funds would then become immune to any further penalties.

"If you are hovering under the threshold, consider acting sooner rather than later to prevent growth tipping you over the limit and increasing your liabilities," said Mr Porter. 

"As the lifetime allowance is only set to increase in line with inflation each April, there will not be much leeway if you are already at the upper end."

He added: "Regardless of whether the lifetime allowance will affect you, with Brexit around the corner, now is a good time to review your pension options.

"If you are living in Spain, France, Portugal, Cyprus, Malta or anywhere else, you should regularly check your financial planning to make sure you take advantage of available opportunities and protect your wealth in the most suitable way for your particular circumstances."