Pensions held overseas fully taxable from April 2017, HMRC confirms

From the new tax year 2017/18, the full amount of any foreign pension received by a UK resident will be taxable where no UK tax relief was given on the pension savings, replacing the old 90% limit

This includes any income from a qualifying recognised overseas pension scheme (QROPS), which will also be taxable in the UK in the normal way.

HMRC has now updated the guidance on the tax position for overseas pensions, clarifying that current tax relief will be removed.

The rule to tax only 90% of a UK resident’s foreign pension was introduced to reflect the additional expenses incurred in earning that pension. The government has changed the rules saying that there is no justification for the 10% tax exemption as there is no similar deduction for UK accrued pensions that did not receive tax relief.

Double taxation relief on foreign pension savings

So far, HMRC has still to update guidance on how the new UK tax treatment of foreign pensions interacts with funds built up with UK tax relief before and after 6 April 2017 and the order in which funds are said to be used.

Lump sums from pensions held overseas

For UK residents, the new rules apply to lump sums paid out of funds built up in overseas employer-financed retirement benefits schemes (EFRBS) while working overseas since 6 April 2017. The lump sums pension holders are entitled to receive out of funds built up before that date will receive their former tax treatment. This has been clarified in Finance Bill 2017.

Section 615 schemes

The draft legislation in Finance Bill 2017 has been clarified and extended so that the changes apply to section 615 schemes that provide defined benefits, as well as defined contribution schemes.

This will see the withdrawal of favourable tax treatment for benefits built up in a section 615 scheme on or after 6 April 2017 but the changes will allow for limited increases after that date.

The limit will be the annual amount of increase in the pension previously allowed under the scheme rules or the rate of the consumer prices index.

Payments to a scheme solely to fund a deficit in respect of entitlement built up before 6 April 2017 will not lead to a loss of favourable tax treatment nor will they be considered additional benefit build up.

Benefits built up before 6 April 2017

Specialist foreign service pension schemes will continue to receive tax relief on essential payments to those schemes made on or after 6 April 2017 in respect of entitlement to benefits that built up before that date.

Contributions or build up of benefits after 5 April 2017, or any increases over the limit, will be treated in the same way as contributions to an EFRBS. They will be subject to the tax rules on EFRBS and employment income provided through third parties.

The HMRC guidance, Pension Tax for overseas pensions: additional information, is available here

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