Tuesday, February 7, 2012
Guernsey Finance - the promotional agency for the island's financial services industry has confirmed that the Guernsey government will act to protect local providers of QROPS pension arrangements if the UK tax authority, as expected, pushes ahead with changes to its QROPS regime, expected to be introduced from April 6, 2012.
The legislation, included in Chancellor George Osborne's Finance Bill 2012 package, would revise the conditions a scheme has to meet to be a Qualifying Recognised Overseas Pension Schemes (QROPS).
QROPS are pension schemes established outside the UK with broad similarities to a UK-registered pension scheme. At present, the government provides tax relief on pension savings in UK registered pension schemes. When an individual transfers those pension savings that have benefitted from these reliefs to another registered pension scheme or to a QROPS, the transfer can be made free of UK tax where it does not exceed the lifetime allowance. The allowance is currently GBP1.8m, but from April 6, 2012 this will reduce to GBP1.5m.
According to HM Revenue and Customs (HMRC), the government allows these tax-free transfers because they enable people permanently leaving the UK to simplify their affairs by taking their pension savings with them to their new country of residence. However, the government has found that QROPS are being marketed by some territories as a way of paying amounts or enabling the payment of amounts that are not allowed under UK rules (in particular 100% lump sums) once UK tax rules no longer apply to counter tax avoidance.
Under the new legislation, the government will revise the conditions that a scheme has to meet to qualify as a QROPS and introduce an acknowledgement by the individual, to be completed before a transfer is made, that UK tax charges may apply.
In response, Guernsey service providers, including the Guernsey Association of Pension Providers (GAPP), are submitting consultation responses which agree that most of the proposed changes are appropriate but are lobbying firmly against the introduction of a new clause, Condition 4, which would require that residents and non-residents be treated equally in terms of tax on benefits paid within any QROPS scheme, in order for the scheme as a whole to be approved by HMRC as a QROPS.
Peter Niven, Chief Executive at Guernsey Finance, said: “Guernsey Finance welcomes the approach being taken in response to HMRC’s proposals.”
“The Guernsey Income Tax Office remains engaged with HMRC and local service providers, including GAPP, and is making robust yet constructive responses to the consultation. Most of HMRC’s proposals are directed towards eliminating abuse in parts of the overseas pensions system and this is an aspiration which Guernsey fully supports. However, there is a feeling that the new Condition 4 unintentionally runs counter to those objectives by having the greatest adverse impact on those cooperative and compliant jurisdictions, such as Guernsey.”
“HMRC’s focus in this regard is also surprising because QROPS are designed for pensioners who have permanently left the UK and typically tax is only liable in the pensioner’s country of residence. Therefore, with currently no tax liable for payment in the UK and the expectation of this remaining the same under the proposed new regime, there will continue to be a net nil benefit to its exchequer. [Furthermore], the Foot Report commissioned by the last UK government highlighted the positive contribution of flows from Guernsey banks into the UK economy and indeed, much of the funds from Guernsey QROPS are invested through the City of London.”
“For these reasons, we remain hopeful that HMRC will repeal or amend Condition 4 but we have to be prepared for the possibility that it may be implemented, as currently drafted, from April 6. As a result, especially given the short timeframe for consultation, and the fact that the presence of draft legislation [indicates the proposal may indeed be adopted], it has been necessary to consider changes to [Guernsey's] domestic income tax legislation. It is being proposed that if HMRC pushes ahead with its plans then we will introduce a new, separate pension regime designed to meet the newly-proposed criteria for QROPS where both residents and non-residents are exempt from tax on pension benefits.”
Guernsey Finance confirmed Guernsey authorities are currently considering contingency plans to ensure that Guernsey service providers will continue to be able to offer a competitive environment for QROPS should the UK push ahead with its proposed changes.
Among proposals, Guernsey's Treasury and Resources Department has announced the possibility of creating a new category of pension scheme which, by extending the tax exemption on pension benefits to residents, is designed to meet HMRC’s proposed revised criteria for a scheme to be considered a QROPS. The plans for the new, separate pension regime will be considered by the Guernsey government at its meeting in early March and if approved, will be introduced ahead of any implementation by HMRC of its planned changes from April 6, 2012, the government has confirmed.
“What this shows is that Guernsey recognises the importance of the QROPS industry and is prepared to act collectively, quickly and decisively to ensure that our service providers can continue to satisfy the HMRC criteria for QROPS and thereby offer pensioners reassurance that they will have continuity of access to a compliant and competitive Guernsey product.”