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QROPS: US treatment on transfers from UK pensions
Individuals who participate in UK pension schemes, particularly those who leave the UK, may consider transferring their UK pension funds overseas into a QROPS (Qualifying Overseas Pension Scheme).
This tax-free transfer for UK purposes may offer a couple of advantages, such as potentially avoiding a 55% UK income tax charge on death. /p>
What happens when the individual is a US taxpayer?
An increasing number of individuals and their financial advisors are facing this question. Before we look to the US tax answer, here are a few ground rules:
- The US taxes residents on worldwide income under US rules
- Non-US pension schemes won’t be US qualifying pensions
- Special US rules apply to foreign employer plans
- Personal pensions are often structured as trusts and therefore may be subject to additional foreign trust reporting. These will be transparent so we must look at underlying investments
- Certain tax treaties (such as the UK/US treaty) provide some protection from US tax, either for contributions or internal growth
The UK treaty stipulates that the growth in value in a UK pension is US tax deferred until distributions start. This relief continues even if funds are transferred between UK pension plans.
Is a transfer to a QROP a tax recognition event for US tax purposes?
The short answer is yes. The UK/US treaty provides relief for transfers between UK plans; the US Treasury Explanation to the treaty defines a UK plan as a UK resident plan. As a QROP is not UK resident, the transfer is a tax recognition event.
Is the growth in the QROP currently US taxable?
Generally it will be, but again treaties may help – for example, the Malta/US treaty appears to defer recognition of growth within Maltese QROP plans. However, most QROP locations don’t have that benefit, although it may still be possible to use annuity-like investments to obtain similar deferral.
Are there other benefits?
There may also be UK benefits in transferring a UK pension fund into a QROP but there are administration costs involved.
Any US taxpayer considering such a transfer should consult the F&L Expatriate Tax team to discuss their specific circumstances.