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Are Offshore Pension Schemes aware of their UK income tax liabilities?

Are Offshore Pension Schemes aware of their UK income tax liabilities?

The introduction of the UK Trust Register has given rise to some interesting and worrying conversations for offshore pension providers. The Trust Registration guidance makes it clear that HMRC is not looking to include pension schemes within the registration rules despite almost all pension schemes being “express” trusts per the legislation. However, the exclusion is only for UK registered pension schemes. What about non-UK resident pension schemes with UK investment assets? Quite simply, they are trusts and are within the rules.

This gives rise to a further question: if a non-UK pension scheme that is not a registered pension scheme under the HMRC definition holds UK investments, is it liable to UK income tax? The answer is “maybe” or more probably “yes”, if there are scheme members or potential members who live in the UK!

Disregarded Income rules

The UK tax legislation limits the UK sourced income on which a non-UK resident must pay income tax. The income that is exempt is known as disregarded income.  However, non-resident trusts with UK resident beneficiaries cannot rely on the disregarded income exemption if any income under the trust may be paid to or used for the benefit of a person in the exercise of a discretion conferred by the trust.

The UK resident member will be entitled to receive a pension in the future and so will be entitled to receive benefits paid out of income earned by the scheme. The critical question will be whether future potential benefits will be provided by the pension scheme as a consequence of a discretionary power being exercised. That is less clear.

Discretionary trustee powers?

A pension scheme that is open to the public to join and offers comprehensive and defined rights is unlikely to grant the scheme administrators any discretionary powers. In contrast, pension arrangements intended to provide benefits to single members and their immediate family, of the type typically seen with FURBS, EFRBS and QNUPS, are more likely to give the pension trustees powers that are discretionary in nature. For example, the trustees may have the power to decide what happens to the pension assets on the death of the principal member. If so, the ability for the trustees to decide whether and how to pay out future benefits out of UK sourced income to future potential beneficiaries will mean that the trustees are liable to tax in the UK on any UK sourced income.

There may be trustees of non-UK pension schemes holding UK investments who believe that any income they receive is exempt from tax in the UK, but they will have current and historic UK tax liabilities that need to be reported to HMRC. The added jeopardy for those trustees is the Failure to Correct penalty regime that allows HMRC to charge penalties of up to 200% of any tax lost with the potential for those penalties to be increased in certain circumstances.

Action required

Trustees or scheme administrators of non-UK resident pension schemes should review their schemes for any UK sourced income in order to identify the potential for potential UK income tax liabilities. Trident Tax will be happy to help trustees to understand their UK tax position. There are straightforward solutions to prevent UK sourced income being subject to income tax in the UK to prevent future liabilities accruing.