IRS compliant QROPS for US residents


IRS compliant QROPS – Three Letter Abbreviations (TLA) are used by some advisers to confuse the consumer; here are some examples, DTAs, IRS, SIPP, ROPs make it appear that they know what they are talking about and that you need them. To add in the words Compliant or Regulated just ensures that you are compelled to follow their advice.

This is the third in a series of three blogs about IRS compliant QROPS, US residents and QROPS. We have discussed IRS and Double Tax treaties in the previous blogs. For the previous blogs, the links are:

See how the IRS are now looking at QROPS – Uncle Sam may be in contact with you for the Facts about QROPS (FATCA)

See how the Double Tax Treaty and IRS view QROPS and UK pensions – US residents – UK pensions and QROPS (Part 2)

This final blog is written by Chris Lean and James Pearcy-Caldwell and focus’s on IRS compliant QROPS and the tax position as we understand it for UK pensions, offshore pensions and collective investment funds.

Introduction on IRS compliant QROPS

Once again, we have seen some discussions on an expat forum about the merits of a transfer from a UK pension to a QROPS for those that are resident in the US or are planning to be resident in the US.

Much is made of the fact that Malta is a “compliant” jurisdiction for QROPS for a US resident, thus making it an IRS compliant QROPS jurisdiction. However, is that the real issue and what other questions should we be asking? Put another way, sure, there is a DTA between the USA and Malta but would a US resident be wise to transfer to a QROPS, compliant or not?

There is a need for a considerable amount of advice on this subject, not least tax advice as well as pension advice. IRS compliant QROPS are maybe a red herring!

Tax Compliance

There is a DTA between the UK and Malta and there may be scope to transfer to a QROPS before moving to the US, providing the correct tax advice is taken. ( Disclosure of contributions into the UK pension and growth on those contributions may be needed).

Once resident in the US and considering a transfer whilst in the US, this requires proper US based tax advice as there is an argument that it could be taxable.

Those who claim it is not taxable are relying on an out of date lawyers opinion that has been superseded by comments from the IRS anyway. This is beyond the remit of this blog but most importantly whether right or wrong, it has not been tested in court as yet, nor challenged by the IRS. Therefore, there is a greater risk by performing a transfer to a QROPS due to uncertainty than leaving it where we are guaranteed to know the position in the UK.

Tax on trust funds

If Malta pensions do not qualify as a UK pension then the funds will be assessed as per any other US trust. Therefore, unless funds are IRS compliant then you will have to pay a US accountant to calculate all the taxes due within the growth of any pension fund held in Malta. Whilst the taxes may not be high, the accountant fee probably will be! This even relates to Exchange Traded Funds (ETF) that are not on the US bourse, so beware claims that all European ETF or UK ETF are US tax efficient.

Tax Compliant Wrapper

Here we come to the more obvious trap for a US resident. Offshore salesmen encourage the sale of an IRS compliant QROPS jurisdiction with the wrapper from an insurance company such as Royal London 360 that is based in a jurisdiction with no DTA with the USA. This is done for commission reasons rather than tax reasons for the US.

A US resident may want to invest in US securities and the DTA with the UK and some jurisdictions will allow the claim of tax credits on investments within a UK pension or an IRS compliant QROPS. But, if the funds are invested in an insurance bond (based in a jurisdiction that does not have a DTA with the US) then the withholding tax is applied and no credit can be applied in the US, i.e. not that tax compliant after all!

The LTA

No, not the Lawn Tennis Association in this situation but the Lifetime Allowance for pension funds in the UK. In other words, from April 2016, anyone with more than 1 million pounds in a UK pension ( some exceptions but generally speaking ) will be subject to tax of up to 55% on the excess.

Given that the IRS will not confirm a transfer to a Malta QROPS qualifies as an “eligible rollover distribution (Section 402c)” (i.e. it could be taxed on transfer), it is not clear how or if such a transfer would be taxed. But, leaving the funds to grow beyond 1 million pound in the UK has its own problems on the excess!

In other words, a blanket ‘Don’t transfer to a QROPS if a US resident’ does not always hold water. While this may look like “Damned if you do, damned if you don’t” a good US tax adviser that works with a UK pension adviser may find an interesting solution to the LTA problem.

TailorMade’s con­clusion

Don’t accept all the Alphabet Soup of jargon without getting tax advice on the facts. Utilisation of the word “compliant” is a red herring, as are expressions like an “IRS compliant QROPS”; whilst it may infer something is permissible which it is, it is not saying that it is good advice!

Contact us for further information. We have created a table available to our clients which breaks down the alternative positions on death for people under and over the age of 75 for Defined Benefit schemes, UK pensions and QROPS. If you wish to become a client then please contact us for advice.

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 May 2015


About the Author

James Pearcy-Caldwell

I have lived in various countries, but always remained firmly attached to the good old UK. My only goal is to take the experience and insider knowledge that I have, and be transparent with people so they understand the impact of their decisions.


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