Offshore tax avoidance has grabbed a lot of headlines in recent months.
The latest scandal involves the Panama Papers – the leaking of millions of private financial documents from of law firm Mossack Fonseca implicating politicians in hiding their wealth in secret tax havens.
The allegations have embroiled British Prime Minister David Cameron and Russian President Vladimir Putin among others.
But what the uproar has shown is there is good and bad offshore tax avoidance.
For example, HM Revenue and Customs (HMRC) in London encourages expats to transfer their UK pensions offshore as Qualifying Recognised Overseas Pension Scheme (QROPS).
Good and bad tax
These pensions give expats the opportunity to move their money out of the UK to one of more than 40 offshore financial centres.
The pensions come with tax advantages rubberstamped by the tax man.
They include:
- The chance to take a larger tax free lump sum. The UK cap on tax-free pension cash is set at 25% of the fund value.
For a QROPS this rises to 30%. HMRC stipulates that as long as 70% of a QROPS is ring-fenced to pay a pension in old age, the retirement save can take the remaining amount without penalty.
- No inheritance tax on unspent pensions. HMRC agrees that any money left in a QROPS when the saver dies is exempt from IHT in the UK
- Cash and investments within a QROPS can grow free of taxes
Of course, payments from a QROPS are still subject to the tax rules of the country where the retirement saver lives.
HMRC sanctioned pensions
The point is that moving money offshore is not always unethical or illegal tax avoidance.
QROPS are good offshore tax avoidance sanctioned by HMRC.
If you are holding back from transferring a UK pension fund into an offshore QROPS because of worries that to do so is immoral and will get you into trouble with the tax man, then put that concern aside.
Providing you do not break the rules that govern setting up and running a QROPS, you are not dodging tax.
HMRC does not issue statistics on how many QROPS transfers take place or how much money has been switched overseas in the 10 years the pensions have operated.
However, HMRC has indicated in the past that transfers to QROPS run into the thousands every year and that the money managed offshore now runs into billions of pounds.
QROPS Information and Guidance
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.
