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UK expats looking to do pension transfers after the Brexit transition period could be hit by a 25 per cent overseas transfer charge, Blevins Franks has warned.

Under current rules the 25 per cent tax charge on transfers to overseas pensions does not apply to any transfers within the EU/European Economic Area (EEA).

Earlier this month, as HM Revenue and Customs updated its pensions tax manual as a consequence of the UK leaving the EU, it seemed that the rules would stay the same for now.

In particular, HMRC clarified that the pensions tax charge would not be payable if the qualifying recognised overseas pension scheme (Qrops) receiving the transfer is established in a country within the EEA or Gibraltar and the member is UK resident, or resident in a country within the EEA or Gibraltar.

But Jason Porter, director of Blevins Franks, warned the government may yet decide to make changes to these rules following Brexit.

He said: “As things stand, Brexit should not affect how they can withdraw or transfer other UK pensions. However, the UK currently applies a 25 per cent ‘overseas transfer charge’ on pension transfers outside the EU/EEA.

“This could be easily extended once the UK is no longer bound by EU freedom of movement of capital, so there may be limited time to transfer without penalties.”

The 25 per cent tax charge on transfers to a qualifying recognised overseas pension scheme was introduced to stop people from exploiting tax loopholes when transferring pension funds out of the UK to avoid UK tax.

The overseas transfer charge is effective for transfers requested on or after March 9, 2017 and the extended taxing provisions on payments out of Qrops are effective on and after April 6, 2017.

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 country that the Qrops is based in.

Most recent data from HM Revenue and Customs showed that although the number of transfers to Qrops increased slightly to 5,000 in 2018-19, up from 4,700 in 2017-18, the total value of these transfers was £640m, down from £740m.

A Freedom of Information request by Canada Life last year also revealed the 25 per cent transfer charge was levied on 24 Qrops transfers in the tax year 2018-19, raising £760,846 in tax. 

This was a fall of 20 per cent compared with 2017-18 where 30 transfers attracted charges totalling £1.4m.

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