Stormy seas

When the proposed UK Finance Bill 2012 was published at the start of December it included draft legislation from Her Majesty’s Revenue and Customs (HMRC) (the Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012), ?which has quite far-reaching implications for Qualifying Recognised Overseas Pension Schemes (QROPS).

The consultation period on the draft legislation ends on 31 January 2012 and new legislation, if enacted, will take effect from 6 April 2012.

Shock tactics

The timing of the draft legislation and consultation has really come as something of a surprise. This is especially the case considering the introduction of QROPS in Guernsey was the result of long and detailed discussions between our tax officials and HMRC. Indeed, this had enabled HMRC to agree our QROPS product with the fullest knowledge of the island’s pension and tax regimes. Therefore, it is particularly disappointing that these proposed changes have come out of the blue without any earlier discussion or warning. In addition, of course, the consultation period lasts just two months, one each side of the Christmas and ?New Year break.

However, it is also worth emphasising that these proposals do not single out Guernsey. While some have sought to interpret them in this manner, in reality this is not the case.
The main thrust of the HMRC legislative changes is directed towards eliminating abuses in parts of the overseas pension system and particularly where clients leave the UK and access 100 per cent of their pension pot as one lump sum. This part of the draft legislation is therefore aimed at jurisdictions that allow 100 per cent commutation, such as New Zealand, but this has never been the case for Guernsey pensions, including Guernsey QROPS.

In addition, the HMRC proposals concerning the taxation of pension payments will catch all QROPS providers no matter their jurisdiction, including those in the Isle of Man. Again, the HMRC proposals are surprising because they are well aware that Guernsey has a zero rate of tax for QROPS and that clients are liable for ?tax in their country of residence. As such, if these proposals were enacted, then there will be a net nil benefit to the ?UK Treasury and yet pension holders who are leaving the UK permanently ?to retire will be disadvantaged by facing a more complex and inconvenient set ?of tax arrangements.

On this basis, we can only assume that some commentators are singling out Guernsey because of our position as a market leader for QROPS. It is somewhat ironic therefore that, since the introduction of the current overseas pension arrangements in April 2006, our relationship with HMRC has provided the bedrock for the development of our QROPS industry to the extent that Guernsey is now recognised as the jurisdiction of choice for these products.

Special relationship

Indeed, figures provided by HMRC ?to Concept Group in Guernsey under ?a freedom of information request ?show that of the total number of ?pension transfers out of the UK into QROPS between 1 January 2011 and 30 June 2011, 32 per cent went into QROPS based in Guernsey. New Zealand was the second most popular destination at 28 per cent, Australia ?third on 20 per cent and then the Isle of Man at five per cent, followed by Hong Kong and Malta both on less than one per cent, with the remainder a combination of smaller numbers to ?a variety of other centres.

The figures show that the value of funds transferred into QROPS globally was £121.5m in 2007, before trebling to £358m in 2008 and then rising to £366m in 2009 and £471m in 2010. That took the cumulative total of funds transferred of more than £1.3bn by the end of last year and it is projected that the amount transferred during 2011 could have passed the £500m mark.

HMRC figures for numbers of transfers from 2007 through to the end of June 2011 show that 47 per cent have been made to Australia, 23 per cent to New Zealand and ten per cent to Guernsey, followed by two per cent to the Isle of Man, one per cent to Hong Kong and less than one per cent to Malta. However, the figures solely for ?the first six months of 2011 show a different picture, with Guernsey out in front, followed by New Zealand and then Australia.

Guernsey differs from Australia and in part New Zealand, in that it is primarily a ‘third country’ QROPS destination, meaning that most of the QROPS transferred to the island are ?for individuals who have left the UK to live elsewhere, such as in Europe or Asia. Yet Australia’s QROPS market is comprised almost exclusively of those going to the country to live, while the New Zealand transfers are a mixture of third-country QROPS and those of individuals moving permanently from Britain to New Zealand.

High regard

But Guernsey’s position is built not just on its relationship with HMRC. Our long-standing heritage in servicing trust business means that we have built a wealth of infrastructure and expertise ?for providing overseas pensions at the very highest standards. In addition, the island is well recognised for continually being placed within the very top tier ?of international finance centres globally by external agencies such as the OECD and IMF.

Indeed, Guernsey was one of the first jurisdictions to introduce an effective licensing and supervision system in relation to trust administration services, company management and ancillary services. Our commitment to leading the charge in terms of raising standards in the overseas pensions market is illustrated by the fact that last year the Guernsey Association of Pension Providers (GAPP) introduced a voluntary code of practice for local QROPS providers.

Therefore it is unfortunate that ?an industry which has taken its own steps to improve transparency for advisers and their clients and which has worked so closely with the UK tax authorities should now have a question mark ?placed over its future by this HMRC draft legislation.

The timescale for the consultation is not extensive and so discussions are well underway between the Guernsey Income Tax Office and the local industry with a view to making sure that we respond appropriately. Our next steps will become clearer once those discussions are at a more advanced stage. But what ?is certain is that we will be making ?every effort to maintain our leading position within the QROPS market going forward.

 

Peter Niven is chief executive of Guernsey Finance