Call for evidence: Air Departure Tax (Scotland) Bill - CIOT comments
In addition to removing the 10% abatement for foreign pensions Clause 11 and Schedule 3 of the draft Finance Bill 2017 will (i) extend the period over which UK tax charges arise on payments out of funds that have had UK tax relief in relevant non-UK schemes (RNUKS), (ii) close section 615, ITEPA 2003 schemes to new savings, (iii) align the tax treatment of funds transferred between registered pension schemes (RPS) and (iv) bring payments of foreign pensions and lump sums fully into tax for UK residents. The conditions that a pension scheme has to meet to be a qualifying overseas pension scheme (QOPS) or a qualifying recognised overseas pension scheme (QROPS) are also to be updated.
The removal of the 10% abatement is intended to be a ‚ fairness‚ measure. The government‚ s Tax Informant and Impact Note (TIIN) states that the objective of the measure is to prevent the further marketing of pension schemes outside the UK to avoid UK tax. While the CIOT does not disagree with the stated objective of the measure, ie the prevention of tax avoidance through marketed schemes, the 10% abatement has been a long-standing tenet of the UK tax system and its removal will also affect, for example, pensioners who receive pensions from overseas governments. Since the recipients of such pensions have absolutely no control over the source and location of their pensions and are likely to be on fixed incomes with limited opportunity to supplement their income the CIOT has suggested that the government‚ s objective could be achieved by, for example, introducing a limited TAAR. We also recommend that, if it is not possible to narrow the application of the new measure to the government‚ s stated targets, then the government should (i) write to affected pensioners to notify them of the change and (ii) delay implementation of the measure for one year for pensioners in receipt of non-UK pensions as at 23 November 2016 in order to provide them with time to prepare for a reduction in their income.
The period of an individual‚ s non-UK residence during which UK tax charges can apply to payments out of pension savings in overseas pension schemes that have had UK tax relief is also being extended from 5 years to 10 years. The new extended 10 tax year period applies to contributions made on or after 6 April 2017. The CIOT has asked HMRC to clarify how this extended period will work in practice. For example, if part of a fund is withdrawn after, say, 7 years of non-UK residence, how one determines which set of savings the employee is accessing may decide whether or not an unauthorised payment charge could be in point.
In addition, the treatment of non-UK registered pension schemes is to be aligned with registered schemes in terms of accrued rights, treatment of UK-relieved funds, rights under the scheme and relevant contributions. These amendments are to have effect for the tax year 2017-18 onwards. The CIOT has asked HMRC to clarify its view of the tax position up to 5 April 2017.
Finally, lump sums paid under foreign pension schemes to or in respect of UK residents are to be brought into charge for UK tax purposes, such that from 6 April 2017 any lump sum paid to a UK tax resident is potentially to be liable to UK tax in full. The CIOT has queried the rationale for making this change in that it would mean that those who have worked potentially their entire career outside the UK but who choose to settle in the UK pre-retirement will be taxed in full on any lump sum they receive. We understand that the policy intent is for this change to apply only to lump sums paid out of funds that are built up from 6 April 2017. If so, this will prevent ‚ cliff-edge‚ taxation of those unable to retire and take lump sums before 6 April 2017. We have urged the government to confirm that is indeed the case and to amend the draft legislation so that the law is consistent with this approach.