Jonathan Crowther, freelance consultant, looks at international pension schemes for non-UK domiciliaries working in the UK
A unique aspect of the UK tax system is its approach to taxing non-UK domiciled individuals who are resident in the UK on their foreign income, gains and assets, and this approach is extended to the treatment of offshore pension schemes set up for such individuals.
Prior to A-Day, a non-UK domiciled employee in receipt of 'foreign emoluments', that is, working for a non-UK employer but seconded to a UK company, could remain a member of an overseas scheme if HMRC accepted the overseas scheme 'corresponded' to a UK approved scheme. If it did there was a process by which the scheme would be granted approval. Relief was then available for contributions, both by the individual and the employer, to that scheme. No tax charge arose on the employee in respect of employer contributions and those contributions were usually charged into the UK by way of a management charge from the overseas employer to the UK company.
An overseas scheme 'corresponded' if it:
• was established in the country where the employee either resided or worked immediately before coming to the UK, or was an international pension scheme for all expatriate employees;
• provided a reasonable amount of benefits, generally considered to be a maximum pension of 70% of final salary;
• had as its primary purpose the provision of 'relevant benefits' as defined in ICTA 1988 s.612; and
• provided for reasonable employee and employer contributions to the scheme in relation to the benefits to be paid.
Relevant benefits were defined by s.612 (now repealed) as: "Any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or by virtue of a pension sharing order or provision, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given on or in anticipation of or in connection with any change in the nature of the service of the employee in question, except that it does not include any benefit which is to be afforded solely by reason of the disablement by accident of a person occurring during his service or of his death by accident so occurring and for no other reason."
Since 'pension' is defined neither in statute nor in case law and the s.612 definition of relevant benefit is very wide, such schemes are very flexible in terms of the benefits that can be provided. Furthermore, if an individual had had a number of secondments in the UK he could consolidate his pension arrangements using a 'transfer trust' which in turn could be engineered for tax efficiency vis-à-vis the country of his eventual retirement.
From A-Day corresponding approval will no longer be granted. However, individuals who received "corresponding relief" on contributions that they and employers made to a scheme in 2005/06 will continue to obtain relief for 2006/07 and future years so long as certain conditions are met and the scheme manager provides the certain information about the individual's benefit crystallisation events. Essentially the scheme must correspond to a UK registered pension scheme for employer contributions to be deductible.
Where an individual has a right to retire earlier than age 55 under a corresponding scheme's rules they will retain that right provided it was in place before 10 December 2003. The minimum pension age for corresponding schemes established between 10 December 2003 and 5 April 2006 will be age 55 for members who retire after 5 April 2010.
Therefore while corresponding schemes can continue, and contributions can continue to be made tax efficiently by individuals and employers, they must comply with a more rigid disclosure and benefit regime. The alternative will be to default into the EFRBS regime discussed in previous articles n
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