Finance (No.2) Bill 2016/17

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1 ADVISER FACTSHEET Tech Talk April 2017 Finance (No.2) Bill 2016/17 The Finance (No.2) Bill 2016/17 was introduced to Parliament on 14 March This bulletin provides a brief summary of the main pension changes it contained. It should be noted that as the Bill makes its way through Parliament it may be subject to amendments. Contents Overseas pensions Overseas transfer charge Money purchase annual allowance (MPAA) Pensions advice Comment For professional advisers only

2 Overseas pensions The Bill makes changes to the UK tax charges that arise on overseas pension savings, including where payments are made out of funds that have had UK tax relief, and where foreign pensions and lump sums are paid to UK residents. It also provides for no new pension saving in specialist pension schemes for foreign service and aligns the tax treatment for registered pension schemes whether based in or outside the UK. Non-UK registered pension schemes The Bill sets out how the rules in Part 4 of the Finance Act 2004 (FA 2004) apply to registered pension schemes established outside the UK (non- UK registered pension schemes). The rules are targeted at UK-relieved funds under such schemes to ensure that they are treated in the same way as rights under a UK registered pension scheme. For example, in connection with non-uk registered pension schemes, the new legislation: gives HMRC the power to lay regulations clarifying how tax relief applies sets out provisions regarding the annual allowance charge sets out provisions regarding taxable property These provisions take effect from 6 April UK-relieved funds held under a non-uk registered pension scheme are sums or assets that; 1. represent accrued rights that at any time previously were held under a registered pension scheme established in the UK, 2. at any time formed the UK tax-relieved fund under a relevant non-uk scheme (see paragraph 3, Schedule 34, FA 2004), or UK residents: tax on foreign pension income From 6 April 2017, 100% (instead of 90%) of the foreign pension income of UK residents will be brought into charge for UK tax purposes. Section 615 schemes These schemes are specialist pension schemes used to provide pension savings for those working solely outside the UK. Such schemes enjoy specific tax treatment under UK legislation e.g. relief from tax in respect of annuity payments from those schemes and in order for this treatment to be protected they must meet the benefit accrual condition. The benefit accrual condition is defined in terms of the type of pension arrangement. For the condition to be met under a money purchase arrangement no contributions must be paid to the arrangement on or after 6 April In the case of a defined benefit arrangement no benefit accrual on or after 6 April 2017 is possible. Legislation sets out what is meant by benefit accrual for this purpose. Money purchase arrangement and defined benefit arrangement are defined in accordance with Part 4 FA UK residents: lump sums from foreign pension schemes The changes being introduced are designed to tax lump sums from foreign pension schemes paid to UK residents that are not already liable to UK tax. Where the lump sum is paid under a pension scheme that meets the definition of an overseas pension scheme i.e. a scheme established in a country or territory outside the UK that satisfies the requirements prescribed by HMRC, the lump sum will receive the same tax treatment as the same payment made under a registered pension scheme. 3. represent accrued rights when the member has accrued rights under the scheme that benefitted from UK tax relief. 2

3 The application of member payment charges to non-uk pension schemes The member payment charges as set out in Schedule 34 FA 2004 are: the unauthorised payments charge, but not a taxable property unauthorised payments charge imposed by virtue of section 174A Finance Act 2004 the unauthorised payments surcharge the short service refund lump sum charge the serious ill-health lump sum charge (where the lump sum is paid before 16 September 2016) the special lump sum death benefits charge charges under section 636A(1A) and (1B) of the Income Tax (Earnings and Pensions) Act 2003(ITEPA) on payment of an uncrystallised funds pension lump sum, and Payments to or in respect of a member of a relevant non-uk scheme that has pension funds or rights built up under that scheme, which have benefitted from UK tax relief, or who has transferred into that scheme from a registered pension scheme or another relevant non-uk scheme where the transfer is not taxable as an unauthorised payment, will continue to be subject to the member payment charges. Such members will continue to be subject to these charges if the individual is a UK resident or has been resident in any one of the previous five tax years to the extent that the contributions were made or transfers received before 6 April The Bill extends the charging provisions outlined in the previous paragraph to cover a 10 year period and apply to payments out of funds or rights that accrue or are transferred on or after 6 April 2017 only. charges under Sections 636B that relate to trivial commutation and winding-up lump sums and under 636C ITEPA that relate to trivial commutation and winding-up lump sum death benefits. Overseas transfer charge The overseas transfer charge is a new tax on transfers of pension savings to qualifying recognised overseas pension schemes (QROPS). The tax applies to transfers requested on or after 9 March 2017, except where the transfer is excluded from the charge. The Bill sets out how the overseas transfer charge will operate with the exclusions from the charge, liability to the charge, the amount of the charge and how those liable will account for the charge. Certain aspects of this charge will be covered in a separate Tech Talk. 3

4 Money purchase annual allowance (MPAA) From 6 April 2017 the MPAA reduces from 10,000 to 4,000. The triggers for the MPAA are still the same and these have been covered in a previous Tech Talk. This reduction impacts the alternative annual allowance which increases from 30,000 to 36,000 and the calculation of the alternative chargeable amount, which is used to determine the chargeable amount in a tax year where individuals subject to the MPAA in the tax year have exceeded it. The annual allowance charge is calculated by reference to the chargeable amount (see previous Tech Talk for more detail). There is no change in that it is not possible to increase the MPAA using unused MPAA from previous tax years. Pensions advice A new income tax exemption will apply from 6 April 2017 to cover the first 500 worth of pensions advice provided to an employee (including former and prospective employees) in a tax year. It will allow advice not only on pensions, but also on the general financial and tax issues relating to pensions, allowing individuals to make more informed decisions about saving for their retirement. The new exemption replaces existing provisions which limited the exemption solely to pensions advice and was capped at 150 per employee per year. There are conditions that need to be met for the exemption to apply. Either the pensions advice, or payment or reimbursement, is provided under a scheme that is open to the employer s employees generally, or generally to the employer s employees at a particular location. Or, the employer provides advice to certain groups of employees on grounds of age or ill-health without breaching the generally available or available by location aspects of the former condition. This still relies on the benefit being made available to all those employees in the same situation. The exemption operates at employment level, so that if an individual has more than one employment and each employer provides the benefit in the relevant tax year, the exemption will apply in respect of both. 4

5 Comment The measures covering overseas pension schemes reflect the Government s concern with the current foreign pensions tax regime in the UK - specifically, that the current regime has led to the marketing of some of these foreign pensions tax provisions as ways of avoiding UK tax. Therefore, these measures are aimed at the closer alignment of the UK tax treatment of payments out of foreign pension schemes with the UK s domestic tax regime. Likewise, the introduction of the overseas transfer charge is the latest in a series of measures designed to ensure that QROPS are used as the Government intended. This should come as no surprise because there have been previous Government warnings of continued monitoring of the QROPS regime. The Government s response to the consultation on the reduction of the MPAA confirmed that it had seen no grounds to halt the reduction and this is likely to disappoint some advisers and their clients. The income tax exemption for the provision of pensions advice is the only measure that does not stem from the desire to protect tax revenues and is welcome. With existing pension freedoms, access to financial advice is important and this measure will provide an entry point for individuals currently unable or reluctant to seek advice on grounds of cost. Further information John Dunn Pension Specialist Technical Support Unit Visit the Technical Hub for further information: Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHSTT 01 APR17 LD 5