British citizens living overseas have clearly been under scrutiny of the British government and many expatriates will find themselves on the receiving end of some of the decisions made in this week’s budget. In this article we take a look at some of the important changes that were made and how these will impact people living abroad.
One of the most prominent areas to come under scrutiny was that of the overseas pensions or Qualifying Recognized Overseas Pension Scheme (QROPS). It is clear that authorities in the United Kingdom are concerned that the spirit of the scheme is being manipulated in some areas and that new regulations are required. One of the biggest concerns of the HMRC in the U.K. is that QROPS pensions are not being used as they should be, to provide “an income for life” and that people are using the funds to extract tax-free cash lump sums. As such, from April the 6th onwards, any fund that is perceived to be allowing this practice will no longer be considered to constitute a valid QROPS and will be subject to additional tax charges. Under the new rules, expatriate pensioners will be permitted to take 30 per cent of their fund in a tax-free lump sum but, following that, any remaining funds must be used on an “income for life” basis. Any schemes that allow larger amounts to be withdrawn will no longer qualify as QROPS and any amounts transferred to those scheme will be subject to a 40 per cent tax rate. Surcharges of 15 per cent may also be applied in some cases.
Expatriate pensioners will be permitted to transfer a maximum of 1.5 million GBP to a QROPS fund for the 2012/2013 year but anything above that amount will be taxed at a 25 per cent rate.
It will be the responsibility of expatriate pensioners to ensure that the schemes they use are valid QROPS and the fact that such a scheme is included on the HMRC list will not be sufficient. HMRC clearly states: “While HMRC performs checks on the information supplied, we do not look at each application in-depth. The fact that a scheme has been given a QROPS number by us or appears on the published list of schemes on our website should not be read by you as a guarantee that the scheme meets the requirements. You should undertake thorough research into the overseas scheme before transferring your pension funds.”
New Tax Brackets
While tax bracket changes have been delayed until the 2013 Financial Bill, the measures that are expected next year will prove to be very significant for expatriate finances. In April 2013 HMRC is expected to introduce new categories for expatriates. The new categories, A,B,C and D, will determine the amount of tax that expatriates are expected to pay in the United Kingdom, with “A” denoting that an individual is non-resident and “D” denoting that they are a full U.K. citizen. The grey areas are those expatriates who are classified as “B” and “C” and it is those expatriates who may find themselves on the receiving end of new tax requirements. Expatriates who do not wish to pay tax in the United Kingdom are advised to separate their financial affairs from their home country as far as possible in order to ensure that they are placed within the category “A” classification.
Further information: IFA Online