QROPS for US Residents
Up until very recently, it wasn’t possible for US citizens or US residents (whether they were retiring UK citizens or US citizens returning from working in the UK) to transfer their UK pension into a US QROPS.
This was problematic for the more than 800,000 British expats who have moved to the United States to either work or retire there, and for their advisers, whose hands were tied by restrictive US tax regulations.
The problem lies in the fact that the US Internal revenue Service (the US equivalent of the HMRC, the UK taxman) does not recognise UK pensions in relation to Federal Income Tax. As a result, all UK pension funds would have to be reported to the IRS, and all resulting fund growth and income produced from the pension could be liable to US Federal Income Tax, depending on the availability of foreign tax credits.
The Malta – USA Double Taxation Treaty: a New Era for US QROPS
The recently enacted Double Taxation Treaty (‘DTA’) between Malta and the United States has revolutionized the QROPS landscape for US residents and US citizens, who can now benefit in full from the various advantages of QROPS pension transfers that thousands of expats have been enjoying since 2006.
The tax treaty is unique in that it expressly legislates for pensions, including QROPS schemes. Article 18 of the tax treaty expressly states that a Malta QROPS scheme will be treated as a US qualifying pension fund.
Thus a QROPS established in Malta offers the following unique tax benefits and features for US residents and citizens:
- A Malta QROPS is recognised as a ‘qualifying pension’ under US law – thus the US tax authorities accept Malta QROPS as fully compliant with IRS rules – and therefore no reporting is required in relation to any income or gains made by the pension fund.
- All investment growth, income and gains within the pension pot accrue tax free, and is not liable to Federal Income Tax;
- 30% of the pension can be taken out as a tax free lump sum;
- There is a possibility to take out further lump sums, free of US federal Income Tax pursuant to the Malta/US Tax treaty.
In addition, a Malta QROPS scheme benefits from a variety of other benefits for US residents, including;
- Increased investment flexibility;
- Ability to draw down income from the pension at age 50 (certain restrictions may apply);
- Ability to hold the pension funds in US Dollars, and
- Have your gross pension income paid directly to a US bank account, in US Dollars.
And by transferring your UK pension into a Malta QROPS, a member will avoid the following UK tax charges:
- A Malta QROPS enables all pension income to be paid gross, and outside the scope of UK income tax;
- Removes any restrictions in relation to the UK Lifetime Allowance (currently £1.5 million, and to be reduced further to £1.25 million in the 2014/15 tax year);
- On a plan member’s death, lump sum benefits can be made to beneficiaries without incurring a 55% tax charge.
Which groups of people can benefit from a QROPS?
There are 4 groups of people who may benefit from transferring their UK pensions into a US QROPS scheme:
- US citizens who have worked in the UK and have UK pensions, and have now returned to the US;
- US citizens who have worked in the UK and have UK pensions, and who have permanently left the UK, but are now living or working in another country;
- UK citizens who have retired to the US, and with to transfer their UK pensions.
- Green Card holders who have a UK pension and lives outside the US and the UK.
Taxation and Reporting Requirements for a US QROPS
- Transfer from a UK Pension into a US Qualified Malta QROPS Plan – under the Malta and US tax treaty, there is no taxable event as a result of the initial transfer from the UK pension into the Malta QROPS scheme.
- Taxation of pension income prior to draw down/distribution of the pension – under US annuity taxation rules, no tax will be due until distribution of the pension plan commences.
- Taxation of income distributed under the Malta QROPS – pursuant to the taxation treaty between Malta and the US, there will not be any income tax withheld by Malta, and any distributions will be taxed in the US under taxation of annuity rules.
- Death of the QROPS plan member – upon the death of the member (provided the member is still US resident, if not a US citizen), there are no Federal Tax reporting requirements, or taxes payable. However, upon distribution to any US resident or US citizen beneficiaries, there are tax reporting requirements, and any receipts may be taxable.
US QROPS Reporting requirements
The Foreign Account Tax Compliance Act (FATCA) has imposed significant reporting requirements on financial institutions who have US citizen clients with investments outside of the US. Whilst FATCA does not impose any specific reporting requirements on the QROPS plan member, the QROPS plan administrator has a duty to notify the IRS of certain information, and the QROPS plan member’s interest in the QROPS may be disclosed to the IRS.
Other US QROPS reporting requirements include:
Form 8938 (Statement of Specified Foreign Financial Assets) – this form is relevant if the plan member has significant non-US financial assets. However, note that if the QROPS Malta plan member has filed Form 3520 and 3520-A (Annual Return to Report Transactions with Foreign Trusts), there is no requirement to also file Form 8938.
FBAR (Report of Foreign Bank and Financial Accounts)– Form TD F 90-22.1 – this form must be filed irrespective of whether Form 8938 has been filed.
The above is our understanding on the tax position and reporting requirements of a QROPS for US residents and US citizens. The following is intended for informational purposes only. In particular, please note that all filing and reporting must be carried out by a qualified tax advisor, as the penalties for late filing and/or non-compliance are very severe. If you require specialist US tax or legal advice, please contact us, and we can put you in touch with a US qualified attorney or accountant as appropriate.
Advice on QROPS for US residents
Pension transfers from UK schemes into QROPS for US citizens and residents can be incredibly complex, and it is essential that you speak with a professional adviser if you are contemplating a QROPS transfer.
Specialist advice is required from professionals who understand the tax laws of both the US and the UK. Moreover, the correct pension solution for one person may not be suitable for another – QROPS are not a ‘one size fits all’ product, and this is especially case when advising US citizens and US residents on their retirement and pension planning.