IRS Approved QROPS
Is there such a thing as HMRC or IRS Approved QROPS? With a quick internet search, and so many unregulated websites using this term, you could justifiably believe that QROPS are HMRC approved or you can have IRS Approved QROPS. However, you would be wrong!
Let’s be clear here, the old system of HMRC giving approval to UK pensions came to an end in 2006 as part of pension simplification… and IRS Approved QROPS?
First we must explain that HMRC “register” UK pensions and “recognize” QROPS in regions, but they do not approve them, and that includes in the USA. The IRS does not recognize the term QROPS, preferring to liken them to Trusts in conversations. Therefore, the IRS does not respond to enquiries about IRS approved QROPS.
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What could be deemed to be an IRS Approved QROPS?
From the 9th March 2017, an Overseas Transfer Charge of 25% will be applied on any pension transfer by US residents to any pension outside the UK. While a US QROPS itself could avoid this charge, the option to do that is taken away by the IRS.A quick look at the ROPS list on the HMRC website (HMRC ROPS List) shows the grand total of two schemes.
A 401k and an IRA retirement plan, commonly used in the US, will not accept payments originating from a UK pension scheme. As HMRC wrote the QROPS legislation but do not approve providers, why on earth would the US approve providers in other countries for which there is no approval process in the UK? Where its the list of IRS approved QROPS?
For clarity there are no US QROPS “approved for US citizens or residents”, and a transfer to places like Malta will result in a 25% tax charge on the fund.
As a result of an inquiry made to the IRS, they have indicated that under ordinary circumstances previous transfers between states (UK and Malta in this case) would not have come under Article 18(1) of the 2001 United Kingdom-United States Double Tax Treaty, and the distribution may be viewed as taxable, this is because it is unlikely to be deemed a tax-deferred rollover distribution.
What are the different arguments made?
It has been argued that trust plans outside of the U.K. are not recognized as qualified UK pension plans and UK plans cannot be transferred to the USA or anywhere else and remain recognized as qualifying by the IRS. Therefore, in this instance the argument would be that the pension cannot be transferred from state to state as a tax-deferred rollover distribution, as is possible with a US IRA or 401k. Experts argue that if it is not tax-deferred then it becomes taxable on the whole amount at point of access; this is yet to be tested one way or the other through courts.
Additionally, as well as potential tax charges and penalties, the IRS view QROPS as trusts and may require annual foreign trust reporting.
Aisa International is not licensed to give tax advice on pension transfer matters – nothing on this page or website should be construed as personal tax advice in the US but only as guidance on the questions you should be seeking answers to.