If you are an expat and a tax resident in France with your pension in the UK, you may be liable to pay tax in the UK. However, with the right international pension advice, it might be possible to transfer your pension fund out of the UK into a Qualifying Recognised Overseas Pension Scheme (QROPS) allowing you to benefit from advantages. Our independent financial advice regarding transferring pensions offshore is specifically aimed at those who plan not to return to the UK as a resident.
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offered to pension holders in April 2015 meaning that in most ‘defined contribution’ cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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 France and the UK expresses that income is taxed in the country in which the pension arises but also, for residents of France, in France as worldwide income. The individual can apply for tax relief at source from HMRC in the UK for non-government pensions taxed in France for residents of France. With regard to government pensions, the elimination of double taxation on income taxable in the United Kingdom is made through a tax credit corresponding to the French tax that would have been paid on the pension income.
This means that a UK-sourced pension is taxed in the UK. However, a rebate can be applied from HMRC if the individual is resident in France. UK Government pensions must be taxed in the UK and 100% of French taxes incurred on this income for French residents can be reclaimed from the French authorities.
UK Inheritance tax is not paid where the DTA is in force although death benefit charges may be (see below).
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 France. 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. France and Malta do have a DTA in place which states that Maltese pensions will only be taxed in France. Both pensions ‘in consideration of past employment’ and not considered as such come under this rule. Therefore, the resident in France will pay tax on their Maltese pension in France, not in Malta.
Lump sums in France are taxed at 7.1% income tax, and 7.5% social charges with pension income charged at a rate 10% less than the standard income tax rate.
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 income tax on French residents is 45%. Taxes are levied on income no matter where in the world it is sourced. If income is sourced in France where France constitutes the individual’s centre of economic interests or the individual carries on a professional activity, either self-employed or as an employee, then they are considered resident.
Additionally, if the individual spends 183 days or more in France during a calendar year, then they are considered resident. Likewise, if the individual’s main home is in France.
If an individual enters France with the intention for becoming resident, residency is assumed from day one (if retrospectively).
Taxes on pensions
In France, pension lump sums are subject to 7.5 per cent tax. The UK would only treat the first 25% as a UK tax-free cash lump sum and the rest would be treated as income, French income tax would apply on this remainder.
There are further specific rules relating to lump sums. Four options (four basis for taxation) exist for the individual receiving lump sums. Three are in addition to the above default position (7.5%).
Pay tax at the:
Social charges of 7.4% are applied to lump sums on top of income taxes. However, this is partially deductible (4.2%) against income tax.
British expats resident in France will have their pension taxed under the progressive income tax rates with a 10 per cent reduction - set at a minimum of €352 per pensioner, or a maximum of €3,660 per household. The individual could also face the UK death tax on their pension up to 45% but UK Inheritance Tax is not payable for French residents.
As a general rule, the tax credit should ensure that government service pensions and UK retirement pensions accompanied by an S1 health exemption certificate do not incur social charges (over and above income tax) on their pension income.
State pensions and rental income are taxed in the UK (at source) not in France contrary to other income types.
Capital gains tax and wealth tax apply. Wealth tax applies once the individual has been resident for five years or more and has a worldwide net worth of over EUR 1.3 million.
Taxe d’habitation is a tax on households. There are benefits in the form of deducted amounts for dependents (between 10% and 15%).
France has signed approximately 108 tax treaties and protocols.
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 France. The pension fund will be subject to UK death benefit charges.
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 French resident, tax in France too. 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.
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 French residents, French taxes apply. For non-residents in France, 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.
This general information has been provided on the basis of our understanding of the current legislation in the UK, Gibraltar & Malta as of April 2015. Should any of the information provided be inaccurate, incomplete or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist multi-jurisdictional (where relevant) tax advice so that their individual circumstances can be fully considered.