Rules have changed for your clients with overseas pensions.
Members preparing 2017/18 tax returns for their clients need to remember that the taxation rules changed from April 2017.
What has changed?
Before April 2017 the rule was that only 90% of a UK resident’s foreign pension was taxed. HMRC introduced this to reflect the additional expenses incurred in earning that pension. However, the government announced in 2017 that it ‘isn’t convinced’ that this 10% deduction is justified given that there is no similar deduction for UK accrued pensions that did not receive tax relief.
So from April 2017 the full amount of any foreign pension received by a UK resident will be fully taxable where no UK tax relief was given on the pension savings. This now replaces the previous 90% limit.
If the client is UK resident, 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. Lump sums they are entitled to receive out of funds built up before that date will receive their former tax treatment. This has been clarified in the Finance Act 2017 Schedule 4
Section 615 schemes - favourable tax treatment will no longer apply in respect of benefits built up in a s615 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.
However, schemes providing only replacement rights for those built up before 5 April 2017 in a s615 scheme will be able to keep the same favourable tax treatment under the new scheme.
Benefits built up before April 2017 - Favourable tax treatment for specialist foreign service pension schemes will continue to apply to essential payments to those schemes made on or after 6 April 2017 in respect of entitlement to benefits that built up before that date.
Where all the lump sum was earned overseas prior to 6 April 2017, the relief is relatively straightforward to calculate and the taxpayer will generally find that the same relief applies that would have been obtained had the sum been taken prior to the introduction of FA 2017.
Where sums are from before and after 6 April 2017, the calculations may produce different results. FA 2017 highlights the formulae to calculate the amount of relief available for the foreign service. However, a different formula applies depending on the type of non-UK pension scheme.