If your pension remains in the UK, you may have UK tax obligations.
You could do better if you transfer your pension funds out of the UK.
Such a transfer into a Qualifying Recognised Overseas Pension Scheme (QROPS) requires qualified advice.
Here's an overview of your options...but if you have specific questions, don't hesitate to contact us and we'll help.
From 6th April 2006, the rules for UK pension schemes including; retirement annuity contracts, small self-administered schemes, self-invested pension plans, personal pensions and occupational schemes; have been consolidated under ‘Registered Pension Schemes’.
These come under either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most defined contribution cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.
If income is sourced in the UK, as is the case with a UK pension, then even non-UK residents are liable to pay UK income tax on those earnings in the same way as UK residents. Your UK pension, counted as UK source income, will therefore be taxed at your marginal rate. Tax is applied to the 75% that is not included in your tax free sum.
A Double Tax Agreement (DTA) between the country in which you are resident and the UK can mean that you are exempt from UK tax. If the DTA exists between the country in which your pension is held and the country in which you are resident, than you can choose, instead, not to pay tax where your pension is held in favour of being taxed where you are resident. International pensions transfer is a potentially complex business and we would always recommend bespoke independent financial advice to expats considering this option.
The DTA that exists between Belgium and the UK expresses that income is taxed in the country in which the pension arises.
This means that a UK-sourced pension is taxed in the UK and not in Belgium. However, although the income is exempt from tax, it is included in the calculation of taxes on other income that is not exempt - income not sourced in the UK through your pension. Depending on the individual’s location within Belgium, local surtax is charged on both exempt and non-exempt income. The pension must be taxed in the UK to be exempt from income tax in Belgium.
Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on death benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age.
Passing pensions onto beneficiaries after the death of the pension holder is now, in general, less costly. Tax rates are still up to 45% in some cases.
Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die. Independent financial advice with a qualified pension specialist should be sought for individual cases.
Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with Belgium. UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Inheritance tax does not apply in Gibraltar and you are protected from UK inheritance tax.
Gibraltar QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
Independent financial advice should be sought in all pension transfers to Malta.
Belgium and Malta do have a DTA in place which states that pensions will only be taxed in the individual’s country of residence. Both pensions ‘in consideration of past employment’ and not considered as such come under this rule.
Therefore, the resident in Belgium will pay tax on their Maltese pension in Belgium, not in Malta.
UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Inheritance tax does not apply in Malta and you are protected from UK inheritance tax.
Malta QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
What is a resident?
The highest rate of tax on Belgian residents is 50%. Taxes are levied on income no matter where in the world it is sourced. If income is sourced in Belgium by non-residents, they are taxed on this income only. A further surcharge applies (specific to the area in which the resident lives).
If an individual intends to remain in Belgium for minimums of between 18 and 24 months (depending on various factors), than they are considered to be a tax resident.
Employees or directors actively employed in Belgium may be eligible for expat tax concessions. This means that the expatriate is charged some tax as a non-resident.
Residents must pay tax on pensions based offshore whilst non-residents are not required to do so. In the case of non-residents, remittances of these pensions are not taxed either.
Taxes on pensions
Basic tax on pensions depends first and foremost on whether the pension is receiving contributions and/or is in the ‘growth phase’, or whether the pension is being drawn and spent.
The 1st January 2004 represents a cut-off point with pension contributions and pensions initiated after this point to be taxed as they are drawn. For the whole or part of a pension contributed before this date, it depends upon whether the contributions have already been taxed to the individual – whether they were given to the individual or whether the individual earnt and paid tax on the money before it was contributed. This is complex and may well require your qualified financial adviser to discuss specific cases with the Tax Authorities of Belgium.
For pension payments that are taxed in Belgium, taxation varies depending on whether;
Income tax of up to 50% and surcharge is levied upon annuities. Some pension tax relief up to €2,024.12 (2015) is available on annuities. The concession amount is decided based on factors including total income.
For lump-sums, there are various levels of taxation depending on;
If the pension is financed personally and is being drawn before reaching 60 years of age; then the part contributed before 1993 is taxed at the standard rate up to 50% and the part contributed after 1993 is taxed 33%.
Again, with a personally financed pension but with the beneficiary drawing the pension after reaching 60 years of age; the part contributed before 1993 is taxed 16.5% and the part contributed after 1993 is taxed at 10% only.
However, if the lump-sum is employer financed, it is particularly important to consult an independent financial adviser as more complex rules apply for taxpayers:
The local surcharge must also be factored in to lump-sums paid out. Pension benefits made up of both lump-sums and annuities are split for the sake of taxation and each part is taxed according to the rules above.
Lump-sums are generally seen as one time only so where lump sums are paid in instalments or several lump sums are paid out, there is confusion as to how this is treated for tax purposes. This must be taken up with the Tax Authorities working through your qualified international pensions adviser.
Pensions that are converted to annuities are treated as lump-sums calculated by the Tax Authorities. Life insurance premiums are not taxed. Any part of a life plan that is invested is, however. The annuity pay-out is made up of premiums deemed to be 3% investment contributions. This 3% is taxed at 25%. If the pay-out is from a non-EEA entity, local surcharges are applied.
Foreign tax credit
Belgium has no system in place for this. The individual lists foreign tax as a tax deductible expense on the tax return and should benefit in this way.
Are pension contributions factored into income tax?
If the pension fund or company is EEA based, there should be tax relief on pension contributions in Belgium. However, because of the requirements of Belgian employment law, such pensions are not likely to pass the test in Belgium and the individual is unlikely to benefit.
Contributions from employers anywhere (1st Jan 2004 onwards), are not considered in calculations of tax on the individual.
Is a QROPS transfer taxed?
If the QROPS is based in an EEA jurisdiction, Belgium will not generally tax the sum moved. This requires a little extra attention from your independent international financial adviser as there may be exceptions. Outside of the EEA, the transfer will be taxed.
Other (inc. other DTAs)
There is no net wealth / worth tax as exists in Italy for example. Belgium has signed approximately 80 DTAs. No gift or inheritance tax would be due on the foreign pension value transferred.
You have 3 main options:
1) Leave the Pension in the UK:
Protocol of 1st Jan 2013 provides that UK tax will be paid (up to 45%). No tax will be charged on the UK pension in Belgium. The pension fund will be subject to UK death benefit charges.
2) Transfer to a Gibraltar QROPS:
For those members who have been non-UK residents for five years or more, transferring a pension to a Gibraltar QROPS will mean not being exposed to UK taxes on income of up to 45%. The member will pay 2.5% tax in Gibraltar and, if a Belgian resident, tax in Belgium too. The 2.5% Gibraltar tax is claimed back as an expense so the individual is not taxed twice. The QROPS protects from inheritance tax and (assuming 5 years as a non-resident in the UK) it will also protect from UK death benefit charges.
3) Transfer to a Malta QROPS:
Again, assuming the member has been a non-UK resident for five years or more, this option will ensure the pension is not subject to income tax (up to 45%) in the UK. The pension is not taxed in Malta either as the DTA stipulates that, for Belgian residents, Belgian taxes apply. For non-residents in Belgium, the pension is subject to 35% maximum income tax in Malta. The QROPS protects from inheritance tax in the UK (also with a zero rate of inheritance tax in Malta) and assuming a minimum of 5 years as a non-resident in the UK, it will also protect from UK death benefit charges.
We believe the above taxation information is accurate, however tax rates and rules can change, and we are NOT tax experts. Therefore, please do not rely exclusively on the information to determine your liability for tax.
Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.
If you'd like our help with regard to your expat pension options, please get in touch and we will do all we can to help.
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