Gary Boal, managing director at Isle of Man-based Boal & Co, said HMRC’s December proposals to introduce full flexibility to Qualifying Recognised Overseas Pensions Schemes (QROPS) have made no changes to SI 2010/51, the UK legislation which ensures the schemes are exempt from UK IHT.
He says that HMRC has not yet varied or removed the requirement for QROPS to provide 70% income for life contained within SI 2010/51, which will mean that a scheme looking to take advantage of the new flexibility could find that it is no longer IHT-free.
However, schemes that do not embrace the full-flexibility will remain IHT-exempt as they still meet the 70% income for life provision contained in the legislation.
Don’t rush
Boal & Co brought the issue to HMRC’s attention during the consultation period following the proposals, which ended last Friday, and advises QROPS users to wait until the issue is sorted before embracing the flexibility.
“The point no one seems to have grasped is that the HMRC consultation has thus far made no reference to any parallel changes to the rules under which overseas pensions are IHT-free,” said Boal. “I suspect that this is an omission as opposed to deliberate, and Boal & Co brought it to HMRC’s attention very early in the consultation process.”
He added that he would be “surprised” if the Revenue does not amend the issue now the consultation period has closed, adding that until it is sorted or clarified it is “definitely premature” to rush to embrace the flexibility.
“IHT protection is important, and we would never contemplate anything that would compromise that for our existing members,” he added. “It would be best to wait until this IHT-issue has been sorted out.”
Since 2010, SI 2010/51 has ensured that QROPS are subject to the same IHT rules as UK pensions, meaning they are exempt from IHT but subject to 55% death tax.
The UK Government has introduced changes meaning that from April the death tax will be reduced to 45% and there will be no tax on death before age 75. This means that if a QROPS does not meet the criteria for IHT exemption, it could be subject to both a 45% death tax, and 40% IHT.
HMRC’s December proposals brought QROPS in line with plans announced in March’s Budget by George Osborne, which allow someone reaching 55 to take out their entire UK pension pot with 25% tax free and the rest taxed at the retiree’s marginal rate from 6 April.
Shortly after December’s proposals, the Malta Financial Services Authority altered its legislation to mean that Maltese QROPS are now subject to HMRC’s rules rather than local legislation, enabling them to take advantage of the flexibility.
