‘International pension’ foreign service relief – goldmine or minefield?
‘International pension’ foreign service relief
FSR is a valuable ‘international pension’ tax concession but careful planning is essential, especially given restrictions introduced in 2017.
One or other forms of foreign service relief (FSR) may be available where (in particular) lump-sum payments are made from non-UK employer-financed retirement benefit schemes (EFRBSs). However, the extent to which FSR may be available (if at all) will depend on the precise circumstances – in particular, a lump sum payment made to a UK resident individual will only potentially be eligible for FSR insofar as the funds were built up before 6 April 2017. Where FSR turns out to be unavailable, this could also have adverse consequences for the relevant individual’s current/former employer. Careful advance planning is therefore essential.
Where an individual takes a lump sum payment from a non-UK EFRBS and the plan funds were built up (in whole or part) whilst such individual was ‘outside’ the UK, such payment may be fully or partially exempt from a UK income tax charge. One or other forms of FSR may be available:
- Even if the individual is currently UK resident (but subject to restrictions introduced in April 2017) – in which case, the UK’s network of double tax treaties may well also prevent the individual from incurring a foreign tax charge; and
- Even insofar as the payment is referable to certain past periods of UK employment (and sometimes even notwithstanding certain historic UK tax relieved contributions made to the plan).
By contrast, FSR is not available where, for example, pension payments are made to a UK resident individual. Careful consideration should be given as to how a proposed distribution will be classified – as there is no UK statutory definition of the terms ‘lump sum’ and ‘pension’, and recent legislative changes have further muddied the waters.
The April 2017 restrictions
As from 6 April 2017, where a lump-sum payment is made from an EFRBS to a UK resident individual:
- FSR will not be available insofar as, essentially, the plan funds were built up after 5 April 2017; and
- FSR will only be available in respect of older plan funds if certain ‘grandfathering’ criteria are satisfied (which can differ depending on the type of FSR potentially available).
The various different types of FSR
UK income tax charges where distributions are made from non-UK EFRBSs can potentially arise under, inter alia, sections 394, 554 and 574A of the Income Tax (Earnings and Pensions) Act 2003.
Each of these taxing provisions has its own form of FSR and (crucially) such FSR may be available:
- On a ‘standard’ basis – with only periods when the relevant individual was both non-UK resident and working abroad normally being taken into account; or
- On an ‘enhanced’ basis – with certain past periods of UK employment being treated as ‘foreign service’.
With different eligibility provisions applying in each case.
The potential risks
Clearly, determining how much FSR is potentially available and whether or not the ‘grandfathering’/other eligibility criteria will be satisfied is of crucial importance. The relevant UK statutory provisions (especially those introduced in April 2017) are complex and not entirely clear - and HMRC have yet to issue clear guidance.
Where FSR turns out to be unavailable, it is not just the relevant individual who is potentially exposed. The current/former employer may find itself in breach of its PAYE obligations and/or incur a ‘tax equalisation’ liability to the individual - and might, in certain circumstances, even incur substantial NIC charges.
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