Tax efficient investment

The death of QROPS?

A punitive 25% tax charge will be applied to transfers from a UK pension scheme to a Qualifying Registered Overseas Pension Scheme (QROPS), requested on or after 9 March 2017, unless certain conditions apply. These include the genuine need to transfer the pension and the requirement that from the point of transfer:
  • both the individual and the pension scheme are in countries within the European Economic Area (EEA); or
  • if outside the EEA, both the individual and the pension scheme are in the same country; or
  • the QROPS is an occupational pension scheme provided by the individual’s employer.
Moreover, the charge will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have originally applied.

On the other hand, UK tax will be refunded if the individual makes a taxable transfer and within five tax years one of the exemptions applies.

Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.

The change, although seeming onerous, is not expected to affect the majority of transfers to QROPS. However, those seeking to transfer while living in low tax jurisdictions, such as Dubai, will be particularly affected. 

What is unclear from the legislation is the Government definition of a ‘genuine need to transfer’. Clarity on this is needed.

ISA increases re-confirmed and NS&I boost for savers

The Government is continuing to support savers. From 6 April 2017, the overall ISA limit will increase to £20,000. This includes the Lifetime ISA, which allows people up to the age of 40 to open and save up to £4,000 each tax year and receive a 25% Government bonus. The Government bonus applies to savings made thereafter up to the age of 50. The Lifetime ISA can be withdrawn tax-free when put towards a first home or in any case at age 60. The Help to Buy ISA remains available, but the Government bonus can only apply to one of the Help to Buy or Lifetime ISAs.
The NS&I Investment Bond has been confirmed, offering a rate of 2.2% over three years with a maximum investment limit of £3,000. The bond will be available for 12 months from April 2017. The Government believes that this new NS&I Investment Bond is enough to cover all the savings of over half of UK households. It is a welcome boost for savers in a low interest environment.

Tax treatment of foreign pensions
  • The tax treatment of foreign pensions is to be more closely aligned with the UK’s domestic pension regime.
  • Following consultation, the legislation has been revised to set out the position for defined benefit specialist pension schemes for those employed abroad (section 615 schemes) and to clarify that all lump sums paid out of funds built up before 6 April 2017 will be subject to existing tax treatment.
  • These changes will have effect from 6 April 2017.
Tax-advantaged venture capital schemes
The Government will amend the requirements of the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs). These amendments:
  • clarify the EIS and SEIS rules for share conversion rights - for shares issued on or after 5 December 2016 rights to convert shares from one class to another will be excluded from being an arrangement for the disposal of those shares within the ‘no pre-arranged exits’ requirements for the EIS and SEIS;
  • provide additional flexibility for follow-on investments made by VCTs in companies with certain group structures, to align with EIS provisions, for investments made on or after 6 April 2017;
  • introduce a power to enable VCT regulations to be made in relation to certain share-for-share exchanges to provide greater certainty to VCTs, which will take effect on the date from which Finance Bill 2017 receives Royal Assent.
Life insurance policies – part surrenders and part assignments
  • Current tax rules regarding gains generated as a result of part surrender and part assignments of life insurance policies are to be amended.
  • This will allow policyholders who have generated a wholly disproportionate gain to apply to HMRC to have the gain recalculated on a just and reasonable basis.
Reducing the money purchase annual allowance
  • Following consultation the Money Purchase Annual Allowance will be reduced from £10,000 to £4,000 from 6 April 2017.
  • This affects anyone who has flexibly accessed their pension savings, which is generally, but not limited to, drawing an income from a pension either by way of flexi-access drawdown or via one or more uncrystallised funds pension lump sums (UFPLS).
Master trust tax registration
  • The Government will amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime.
  • This will help to boost consumer protection and improve compliance.
  • Legislation will be included in Finance Bill 2017/18 (the Finance Bill following the Autumn 2017 Budget) and will apply to all master trust pension schemes from October 2018.
Additional points
  • Social investment tax relief: several changes will be made to the regime from 6 April 2017. The changes will:
    • increase the amount of investment a social investment may receive over its lifetime to £1.5 million for certain enterprises;
    • reduce the limit on full-time equivalent employees to 250;
    • exclude certain activities, such as asset leasing and on-lending;
    • exclude the use of money raised to pay off existing loans;
    • clarify that individuals must be independent from the enterprise to claim tax relief;
    • exclude investments where arrangements are in place with the main purpose of delivering a benefit to an individual or party connected to the social enterprise.