Investor Briefing
April 2010
Welcome to the April 2010 issue of our Financial Services newsletter and thanks for all your feedback so far.
In this issue, we look back to the relative non-event of the budget, take a look at the ever changing situation of pensions for ex-pats and provide some warnings on inheritance tax traps. Please click on the links below to view each article;
Joint Holdings and Inheritance Tax
Pensions for Ex-Pats
There has always been the facility to transfer UK pension benefits overseas, but until 2006 this was a complex process requiring individual consideration for each scheme and often a translation of the rules of the receiving scheme.
Now, for those who have left the UK permanently or are planning to do so, and those who are UK resident but non-domiciled, much simpler arrangements are available, known as Qualifying Recognised Overseas Pension Schemes (‘QROPS’).
QROPS are overseas schemes to which UK pension savings can be transferred, subject to the receiving scheme having applied for and been granted recognition by the UK Revenue and having pledging its future co-operation.
HM Revenue & Customs maintain a list of QROPS, and any transfer to one of the listed schemes must be notified to HMRC by the administrator of the UK scheme from which the transfer is proposed.
Technically, transfers involve crystallising the UK fund and calculating whether the value exceeds the standard lifetime allowance (£1.8m in 2010/11) above which UK pensions are subject to a tax charge. If the fund exceeds this value, the transfer to the QROPS will only avoid the tax charge if a primary or enhanced protection certificate is in place.
One of the conditions of recognition is that QROPS must report to HMRC all payments of benefits made within five years after the transfer, and the pension holder will be subject to UK tax on any payments which would have been regarded as unauthorised under the UK rules.
After five years, the reporting obligation ceases and the way in which the funds can be invested and payments made and the tax payable will all be subject to the rules of the QROPS and the pension legislation of the local jurisdiction.
However, HMRC is on the look-out for abuse of QROPS. In October 2009 it issued a statement to the effect that if a QROPS were to invest UK-sourced transfer monies in residential property even after the five years had expired, this would need to be reported to HMRC and would give rise to an unauthorised payment charge on the member.
QROPS schemes have varying requirements. For example, some occupational QROPS require proof of employment, whereas individual schemes may only have a residency test. QROPS are complicated, and advice is essential.
Joint holdings and Inheritance Tax
The first case, Sillars v Inland Revenue Commissioners, in 2004, concerned a mother who on the advice of her accountant transferred her building society account into the joint names of herself and her two daughters, each of whom then declared the income received for tax purposes. On the mother’s death the Revenue contended successfully that the account should be taxed in full because it had not been enjoyed to the entire exclusion of the mother.
In the second case, Taylor v The Commissioners of Revenue & Customs, the deceased had placed two building society accounts into the joint names of herself and her brother-in-law, on the basis that only one signature was required and the whole account would pass to the survivor. Again, the Revenue were successful in contending that the whole of the funds should be taxed on the lady’s death.
The safer course in both cases would have been for the donor to gift part of their deposits to the donee so that the donee could set up their own building society account. The gift would then have fallen out of the charge to tax seven years after the date of the gift and there would have been no scope for the argument that the donor had retained a benefit.
For more advice contact Scott-Moncrieff Wealth Management
