When is 45 % UK pension tax applied – the facts and the myths
There are lots of websites that encourage expats to transfer their UK pensions offshore. Every week, we will look at the most popular reasons, often cited as 10 Reasons to use a QROPS by overseas websites for moving a UK pension to a QROPS, one by one. How many of these reasons for moving to QROPS are valid and how do they compare with using the UK counterpart- the SIPP? This week we focus on the avoidance of 45 % UK pension tax that can be applied
This is our second article, which discusses the two points at which 45 % tax may apply, if at all:-
- Don’t Lose 45 % Of Your UK Pension To HMRC UK Income Tax, and
- Don’t Lose Up To 45 % Of Your UK Pension to Inheritance Tax when you die
Don’t lose out to HMRC UK Income Tax – 45 % UK Pension
This is erroneous for a number of reasons-
- The UK has a large number of Double Taxation Agreements (DTA) with other countries- covering nearly all the places where expats tend to retire. If you check Article 17/18 of these agreements, in most cases, the right to tax lies with the host country and not the UK. Therefore the UK will not tax the pension in these cases.
- What if the DTA failed and the UK did tax the pension ? Well, the 45 % UK Pension tax only applies to UK sourced income of over £150,000 per annum. So no one can lose 45 % UK Pension of the whole lot anyway and how many expats have that level of UK income?
- To generate an income of £150,000, a fund of over £4 million would be needed. How many people have funds of this size? (Also, there are additional tax issues to consider for transferring funds of over £1 million)
Don’t lose up To 45 % Of Your UK Pension to Inheritance Tax
UK pensions and QROPS are exempted from UK Inheritance Tax. The pension does not form part of the taxable estate. There is no saving from Inheritance Tax by transferring a pension to a QROPS, and in fact can cause an IHT bill in some circumstances as some countries recognise UK pensions, but not trusts; a QROPS is a trust 90% of the time! Also, transfers can lead to inheritance tax ironically. See our article about this here.
Further, since April 2015, the rules changed and tax is applied in the hands of the beneficiaries, not the settlor. A significant change as it means the location of who is receiving the pension and what tax they pay where they live is key. If the settlor is under 75, and the beneficiary is in the UK the tax is ZERO.
The 45 % tax referred to was a temporary measure (not Inheritance Tax) that applied to pensions before April 2016 and then only in limited circumstances, and was avoidable even with a pension in the UK.
On death before 75, there is no tax on UK funds. For money purchase pensions the whole fund can be paid in cash to the beneficiary. Over 75, the spouse, for example, can leave the fund intact with no tax and take the option of a taxable income ( locally and not 45 % UK Pension tax) . On the death of the spouse, the grandchildren can take tax free income up to their allowances, or children or other beneficiaries can inherit a tax free pension fund in the UK. Pension funds are taxed in the hand of the beneficiaries since April 2015. We suspect no one will pay 45% on the pay-out if they take professional advice, and in most scenarios we see, there will be no tax to pay at all in the UK.
This is the second article about 10 Reasons to use a QROPS- the facts and the myths and we will be publishing more soon
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published in 25th October 2016
- The opportunities for tax planning after the death of a spouse
- 10 Reasons to use a QROPS. Facts and Myths, QROPS Increased Flexibility (7)
- 10 Reasons to use a QROPS – Facts and Myths Summary
- 10 Reasons to use a QROPS- the facts and the myths (1)
- 10 Reasons to use a QROPS – All the Facts and Myths
Share this story