How 50c put the Isle of Man back on the QROPS map

The first jurisdiction to come to the forefront with a strong QROPS offering was Guernsey. Its tax exemption policy on the payment of income to a non-Guernsey resident made it an attractive place to domicile your UK tax-relieved pension benefits. Guernsey has been the premier provider of QROP schemes to date.

Since A-day the Isle of Man (IOM) has done little in terms of QROPS development, other than observe. Most people found this strange, as the IOM has an excellent reputation for the provision of international pension schemes, with some of the world’s largest companies choosing to domicile their pension schemes in the island because of its AAA status.

However, with effect from 22 October 2010, the Isle of Man entered the ultra-competitive QROPS market, with brand new primary legislation developed from the ground up to enable it to take full advantage of the QROPS rules.

The new legislation was introduced under section 50c of the Income Tax Act 1970. It brings for the first time a pension regime which can take full advantage of the QROPS rules. (It is important to note that the member needs to have been non-UK resident for at least five tax years to benefit from the section 50 provisions.)

The new legislation fully satisfies HMRC’s requirement for approval in accordance with UK Statutory Instruments 2006/206 and 2006/208. Broadly, the requirements are as follows:

1. The scheme is open to both Isle of Man residents and non-residents.
2. The scheme is established in a country which operates a system of taxation as required.
3. Benefits cannot be paid earlier than age 55 (ill health aside).
4. 70% of the funds transferred must be used to pay an income for life.
5. If the member is a UK resident, or has been in any of the previous 5 tax years, the QROPS administrator must report certain events to HMRC.

So what does this mean in practice? Well, for one, it means that the IOM now has a non-resident tax regime for pension business that rivals Guernsey and other jurisdictions, as any benefits paid from a scheme approved under section 50c will be paid free of any tax due to the tax exemption. This includes tax-free cash, pensions and death benefit lump sums.

There is, however, another significant difference in comparison to other schemes. Looking at point four above, it is clear that HMRC requires that 70% of the transfer value received by the QROP scheme must be ring-fenced for the payment of a pension for life.

So what does this mean for the balance of the pension fund? The easiest way to understand what is possible with the balance is by example, as follows:

Example
Mr Foster, aged 40, leaves the UK and transfers £300,000 from this UK scheme to his new IOM ‘50C’ approved scheme.

At this time, 70% of the transfer value (being £210,000) is ring-fenced for the payment of a pension for life.

Mr Foster decides to take benefits from his IOM QROPS at age 60. During the past 20 years Mr Foster’s IOM scheme has grown in value by 5% per year (after charges), and is now worth £795,989. As £210,000 is ring-fenced for paying a pension for life, the balance of the fund, being £585,989 can be paid to Mr Foster as a tax-free lump sum.

The total tax-free lump sum payable in this example is 73.6% of the total fund. When you compare this to jurisdictions like Guernsey, where the maximum tax-free lump sum is restricted to 30% of fund value (£238,797 in this example), you can appreciate the significant advantage that new IOM QROP schemes now have over other competitor jurisdictions.

Isle of Man schemes and administrators are also fully regulated by a pensions regulator, the Insurance & Pensions Authority (IPA), under the Retirement Benefits Schemes Act 2000.

The table below provides an overview of the differences between IOM QROPS, Guernsey QROPS and UK SIPPs.

Taking all factors in to consideration, it is evident that the new legislation introduced by the Isle of Man provides the ultimate destination for both new and old QROPS transfers.

1. The exemption from IOM/Guernsey tax applies to non-residents of those jurisdictions. However, benefits may be taxed in the actual country of residence.

2. Double Tax Agreement, which will detail which jurisdiction has primary taxing rights.

3. Isle of Man Insurance & Pensions Authority, that is the same regulator as for IOM life offices.

4. UK Financial Services Authority.

It is essential to truly understand how they work and what their limitations are, so that you can at least give informed guidance to those of your clients that might ask about them.

If you wish to embark on taking them further, be sure to contact a specialist provider with proven expertise.

Recent announcement

David Gauke, the Exchequer Secretary to the Treasury in the UK, has made a statement that new measures will be included in the Finance (No.3) Bill 2011 to prevent tax avoidance by the use of certain QROPS.

The Government is taking steps to prevent tax avoidance by UK residents in respect of certain pensions receivable from overseas.

In the absence of such action, UK residents would have been able to avoid UK tax by transferring pension savings to certain overseas countries. The new provisions will be backdated to 6 April 2011, subject to the Finance Bill been enacted.

A new clause will provide that, notwithstanding the terms of a double taxation arrangement with another territory, a payment of a pension or other similar remuneration may be taxed in the United Kingdom where:

• the payment arises in the other territory;
• it is received by an individual resident of the United Kingdom;
• the pension savings in respect of which the pension or other similar remuneration is paid have been transferred to a pension scheme in the other territory; and
• the main purpose or one of the main purposes of any person concerned with the transfer of pension savings in respect of which the payment is made was to take advantage of the double taxation arrangement in respect of that payment by means of that transfer.

In the event that tax is paid in the other jurisdiction, appropriate credit will be available against the UK tax chargeable.

It is understood that this amendment has been rushed in following concerns that UK-resident individuals could transfer their UK pension benefits to a QROPS in Hong Kong and then take advantage of the pension article in the new UK/Hong Kong double tax agreement that became effective for income and capital gains tax purposes on 6 April 2011.

The pensions article in this DTA is unusual as it indicates that where a pension benefit arises in one country (such as a Hong Kong QROPS) the arising benefits will be taxed in that country irrespective of the residence of the individual.

Pension articles in DTAs more commonly provide for the pension to be taxed in the country in which the individual who receives the benefit is resident.

Without the amendment it would appear that where benefits are paid from a Hong Kong QROPS to a UK resident they would only be taxable in Hong Kong (at a maximum income tax rate of 15%).

This article was produced in association with Boal & Co, a pension provider based in the Isle of Man.