Question: Is transferring my UK pension to a QROPS a good way to save Inheritance Tax?
Answer: It may not be. Always look beyond the headlines and be very wary about being advised to transfer your UK pension offshore to save inheritance tax.
Background
If you transfer a UK pension overseas to a pension fund in a country where you do not reside there is a 25% charge on the full value of the fund on transfer*.
This has had the effect of dramatically reducing the number of transfers of a UK pension to QROPS (Qualifying Overseas Pension Schemes) as few wish to lose a quarter of their retirement savings on transfer.
From April 2027, UK pensions could be liable to Inheritance Tax (subject to allowances and exemptions) irrespective of whether the now non-UK resident is liable for IHT elsewhere under the new rules However, if the non-UK resident transfers the pension to a QROPS they could avoid the 40% IHT charge as QROPS are not assets.
In fact, I have seen a few comments on websites and social media where it is suggested such a UK pension transfer to a QROPS could save tax.
For example-
“QROPS can provide various benefits, and this option remains available to British expatriates in xxxxx who are prepared to pay the 25% charge. While it sounds prohibitive, it can still be the right decision for some people when they weigh this tax against the liabilities they and their beneficiaries will face if you leave the pension in the UK.”
*There are exceptions but that is outside the scope of this article.
If 25% is less than 40%, then surely my family will save tax!
Not really, in most cases.
If the pension holder is not married, then he/she can leave up to £325,000 with no 40% charge to IHT – only the amount over this is chargeable. If married to a UK spouse there is an unlimited inter-spouse exemption (£650,000 if a non-UK spouse).
So, let’s consider that someone has died (under 75 for this example – we can look at other scenarios in another article) with a £1 million pound fund with a UK spouse who is a long term non-UK resident. The full £1 million can pass to him/her without any 40% IHT charge – leaving the spouse to repatriate the funds outside of the UK and away from IHT on his/her death.
Transferring this UK pension to a QROPS fund offshore, just before death, would have incurred a £250,000 tax charge to avoid the IHT that was not payable on the fund.
Summary and the reality
Always look beyond the headlines and be very wary about being advised to transfer your UK pension offshore to save Inheritance Tax. A proper review by a suitable qualified adviser should be undertaken before you do anything.
The example above is very simplified, other UK assets that the UK non-resident may have will also need to be considered for IHT as part of the overall planning. Given the changes from domicility to residency as a test for IHT and the new UK pension rules, a review for all those that have UK assets and UK pensions would strongly be recommended.
