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QROPS: Where are we now?

Following the popularity of QROPS schemes introduced from 2006, HMRC has made some important changes to the QROPS regime.

QROPS were introduced in 2006 in order to comply with an EU directive that pensions be free to move across Europe’s borders. Their popularity had come as a surprise to HMRC, who could never have envisaged that many overseas firms and governments would become so competitive in terms of trying to ensure their particular jurisdiction was the most attractive home for UK pension monies. HMRC has also become agitated at the aggressive marketing of schemes which were backed by overseas legislation. HMRC appeared to feel that the legislation had been passed with a view to getting around the spirit, if not the wording of the QROPS legislation.

Consequently, on 6 December 2011, HMRC released a consultation document on the proposed changes to the QROPS regime with the final regulations released on Budget Day 2012. A key area of the new regulations was to do with the equal tax treatment of resident and non-resident members. Previously, a QROPS could operate different tax exemptions and/or reliefs on benefits for residents compared to non-residents. For example, some schemes allowed nonresidents to receive payment with no tax being deducted at source. However, as from 6 April 2012, QROPS must treat their local resident members the same as non resident members.

The revised QROPS list issued by HMRC on 12 April 2012 was significantly shorter than it was just before it was suspended at midnight on 5 April 2012. Guernsey was hit particularly hard. After reviewing the draft legislation, they had worked hard to introduce new 157(E) legislation which ensured both resident and non-resident members did not have tax deducted at source from their pension. Unfortunately, only three Guernsey schemes remained on the new list and the subsequent issue of Statutory Instrument 1221 confirming that, as from 25 May 2012, schemes established in Guernsey which are exempt pension contracts or exempt pension trusts under section 157E of the Income Tax (Guernsey) Law 1975, cannot be recognised overseas pension schemes if they are open to non-residents of Guernsey.

The Isle of Man’s 50c pension schemes also failed the ‘benefits exemption test’ because resident members are currently taxed, whereas non resident members receive their payments gross. However, other schemes established under the Income Tax (Retirement Benefits Schemes) Act 1978, and Part I of the Income Tax Act 1989, have been approved.

The special requirement on New Zealand QROPS that at least 70% of the fund must be used to buy a pension income has left many providers in a difficult position, because this had not been included in their trust deeds. Consequently, many schemes have been removed from the list.

With over 59 double taxation agreements, Malta has remained largely unaffected by the regulatory changes to QROPS. Malta has a Pensions Regulator (The Malta Financial Services Authority) and is a member of the European Union, meaning that HMRC cannot be too draconian with them!

An important point to note however is that HMRC have clarified that if a pension scheme no longer meets the conditions to be a QROPS on April 6 2012, members of that pension scheme will be able to remain as members and receive a pension paid from the sums transferred without incurring additional tax charges.

Third country QROPS are clearly something that HMRC is not happy about, and there can be little doubt that QROPS providers will be under much closer scrutiny going forward. In fact, HMRC have also said that next year’s Finance Bill (FB 2013) will contain further measures to strengthen QROPS reporting and powers to remove QROPS status from overseas schemes.