The Overseas Transfer Allowance

Under the LTA provisions, if a registered pension scheme member transferred their pension fund to a qualifying recognised overseas pension scheme (QROPS) this was a ‘benefit crystallisation event’ (BCE 8) and the fund transferred was tested against their available LTA.  From 6 April 2024, transfers to a QROPS will, instead, be tested against the OTA. 

This article explains how this new allowance operates and how it interacts with the existing provisions relating to the taxation of transfers from a UK registered pension schemes to a QROPS.

The overseas transfer charge

First of all, we need to look at the overseas transfer charge (OT charge).  This charge was introduced in 2017 as a result of HM Revenue and Customs’ (HMRC) concerns that overseas transfers were being used to obtain tax advantages when taking benefits, having received tax advantages in the UK on contributions and fund growth.  HMRC were also concerned that scheme members were being targeted by scammers and fraudsters with promises of, for example, being able to take the full fund tax free or access benefits before age 55.

Broadly, the OT charge applies if a transfer from a UK registered pension scheme to a QROPS does not meet at least one of a number of exclusion conditions.  For example, the OT charge would not apply if the individual was resident in the same country as the QROPS was established, or if the QROPS transfer was to an occupational pension scheme run by their employer.

If the transfer does not meet any of the exclusion conditions, then an OT charge of 25%  will be applied to the full transfer payment.

The OT charge could also be applied where, following an exempt transfer to a QROPS, the individual’s circumstances changed and the exclusion condition on which they relied no longer applied.  See ‘Changes in circumstances’ below.

HMRC’s current guidance on transfers to a QROPS and the overseas transfer charge, including the exclusion conditions, can be seen here:

The guidance has yet to be updated to reflect the introduction of the OTA.

The overseas transfer allowance

From 6 April 2024, transfers to QROPS will need to be tested against the member’s OTA.

Legislation links the OTA to an individual’s lump sum and death benefit allowance (LSDBA).  An individual's OTA will be an amount equal to their lump sum and death benefit allowance.  You can read more about the LSDBA in this article. 

For most people, the OTA will default to £1,073,100 but will be higher if an enhanced LSDBA applies (for example, if they had Fixed Protection 2014).  Benefit crystallisation events which took place before 6 April 2024 will be taken into account by reducing a member’s available OTA by an amount equal to 100% of the value of their LTA used as at that date.

Note that while the LTA related to the overall value of an individual’s benefits (including death benefits), the new lump sum allowance (LSA) and the new LSDBA are limits on the value of certain tax-free benefits paid to, or in respect of, an individual.  You can read about the LSA in this article. 

Each transfer to a QROPS from 6 April 2024 will reduce the individual’s OTA by the amount transferred.  It’s important to realise that the OTA is a stand-alone allowance – although the level of the OTA is determined by the individual’s LSDBA, it is not otherwise directly linked to the LSDBA or the LSA.  Consequently, any transfer to a QROPS made on or after 6 April 2024 does not reduce the individual’s available LSA or LSDBA.  

The overseas transfer charge from 6 April 2024

The pre-6 April 2024 exclusions to the OT charge continue to apply but, following the introduction of the OTA, the application of the charge has been widened.  Consequently, from 6 April 2024, there will be two reasons why the 25% OT charge may be payable:

a)   where none of the exclusions applies, or

b)   because the transfer exceeds the individual’s remaining OTA.

An OT charge payable under a) will take precedence over b).  Therefore, if the member doesn’t qualify for one of the exclusions under a), the OT charge will be payable on the full transfer payment.  If one or more of the exclusions does apply to the member, then the OT charge will be due only on that part of the transfer payment which exceeds their remaining OTA.  So, there won’t be a ‘double charge’ on the transfer payment.

Example

Alex has an OTA of £1,073,100.  He transfers £1.6 million from a UK-registered SIPP to a QROPS on 1 July 2024.  None of the exclusion conditions apply to him so the 25% OT charge is due on the full £1.6 million.  Although the transfer payment exceeds Alex’s OTA by £526,900, no further OT charge is payable.

Changes in circumstances

It’s possible to obtain a refund of an OT charge if, within the ‘relevant period’, the individual’s circumstances change so that an OT charge would not have been due had those circumstances applied at the date of transfer.

The ‘relevant period’ is:

• where the transfer is made on 6 April, five years from that date, or
  
• where the transfer is made on any other date, the period from that date until the next 5 April plus a further five tax years.

This will continue to be the case from 6 April 2024.  However, following the introduction of the OTA, if a change of circumstances means that the OT charge would be disapplied, there will have to be a check against the OTA as at the transfer date.  There will be an OT charge due if the transfer payment exceeds the individual’s remaining OTA.

Example

Beverley transfers £2m from a registered pension scheme to a QROPS on 6 April 2024.  At the time of transfer, none of the exclusion conditions apply.  Consequently, an OT charge is due on the full transfer payment:

£2,000,000 x 25% = £500,000

On 1 July 2025, Beverley’s circumstances change and she now meets one of the exclusion conditions.  As this is within the relevant period, the scheme administrator of the transferring scheme can apply for a refund of the OT charge.

Although the transfer now meets one of the exclusion conditions, it may still be subject to the OT charge if it exceeds Beverley’s OTA.  Therefore, a check against the OTA at the date of transfer is required.  On 6 April 2024, Beverley’s OTA was £1,073,100 so the check against the OTA is:

(£2,000,000 - £1,073,100) x 25% = £231,275

So, the transferring scheme has to pay an OT charge of £231,275 because the transfer exceeded Beverley’s OTA.

Currently, it’s not clear how repayment of the original OT charge and payment of the ‘new’ OT charge will work in practice.  Further details are awaited.

Changes to the Information Requirements

Following the introduction of the OTA, the information the transferring scheme administrators have to give to members and to the receiving QROPS is modified. 

The majority of the information to be given to a member on transfer to a QROPS is unchanged but, from 6 April 2024:

• where there is an OT charge, the member must be told why it has arisen - either because none of the exclusion conditions applies, or that the OTA has been exceeded
  
• if there is no OT charge because one of the exclusion conditions is met, the member must be told this explicitly - the amount of the transfer payment must also be confirmed.

From 6 April 2024, the information to be given to the QROPS depends on whether or not the OT charge applies.

Where the OT charge applies, the QROPS must be told:

• the value of the transfer,
• whether the OT charge applies because none of the exclusion conditions  applies, or because the OTA has been exceeded, and
• the amount of the OT charge.
  

Where the OT charge does not apply, confirmation of the exclusion condition which is met must be given.