The revised Finance Bill 2017 appears to have clarified earlier confusion on changes to overseas pension taxation and the employer-financed retirement benefits schemes (EFRBS), setting out grandfathering provisions, although there are still potential pitfalls
From the new tax year 2017/18, the full amount of any foreign pension received by a UK resident will be taxable where no UK tax relief was given on the pension savings, replacing the old 90% limit.
There was initially confusion over the extent of grandfathering provisions which would be allowed under the new rules, particularly for foreign service relief, although it now appears that grandfathering will be retained.
Adrian Trace CTA, tax adviser at Tax Innovations, said: ‘It is clear that the intention is now to provide grandfathering for foreign service relief on overseas pension rights accrued prior to 6 April 2017, but it is frustrating that we still cannot give our clients firm advice on the basis of the inconsistent information from the government.
‘Some clients managed to take their pensions by the 5 April “deadline” to prevent the loss of their foreign service relief, and it now turns out that they did not need to do so; others couldn’t meet the deadline and will now be happy to find out that they are not going to be hit with a large tax bill when they take their pension in future.’
Under the finalised Finance Bill, the grandfathering provisions are in the new section 574A (which defines ‘relevant lump sums’ – Para 10 of Schedule 3, Finance Bill 2017); in this new s574A, step two of the deductions from the taxable lump sum now states:
‘Where the lump sum is paid under a pension scheme that was an employer-financed retirement benefits scheme immediately before 6 April 2017, deduct so much of the lump sum left after step one as is deductible in accordance with subsection (6).’
Subsection (6) sets out the grandfathering provisions so that foreign service relief up to 5 April 2017 remains in place. However, s574a(1) specifically disapplies EFRBS lump sums from being a relevant lump sum under that section, so the lump sum can never be paid under an EFRBS to receive the grandfathering in that subsection (6).
‘We would expect that the grandfathering provisions should be in Para 5 Schedule 3, where the foreign service relief is being removed under the EFRBS income tax provisions,’ added Trace.
HMRC has now published the amendments to the overseas pension clauses in Schedule 3 of the Finance Bill, amendments 23 to 27, which set out the revisions that will grandfather the existing rules for funds accrued prior to 6 April 2017.