Should you transfer your UK pension?
If so, and your pension remains in the UK, you should be aware of your possible UK tax obligations. Furthermore, benefits could be available should you transfer these pension funds out of the UK to other secure jurisdictions under HMRC’s favourable Qualifying Recognised Overseas Pension Scheme (QROPS) regime.
Leave the Pension in the UK
If the pension remains in the UK, exemption from UK tax on payments may apply if the income is taxable in Israel (at rates up to 45% due to the ceiling provided under section 9C ITO). If tax exempt in Israel (e.g. First Time Israeli Resident etc), UK tax (at up to 45%) would be due. As stated, the relevant Israeli taxpayers may choose to be taxed in Israel during the exemption period, to alleviate UK taxation. Furthermore, the fund remains exposed to the UK death benefit charges.
Transfer to a Gibraltar QROPS
Transferring to a Gibraltar QROPS for non-UK residents (5 years +) can alleviate UK tax on payments (at up to 45%) with tax potentially payable in Israel for tax residents (at rates up to 48%), if Israeli tax exemption is not satisfied, and 2.5% tax payable in Gibraltar. A foreign tax credit is generally available for Gibraltar tax paid. If tax exempt in Israel (e.g. First Time Israeli Resident) only 2.5% Gibraltar tax is due. For non-Israeli residents foreign pension income remitted to Israel would not be taxable. Furthermore, the QROPS can protect from the UK death benefit charges if non-UK resident (5 years +) and there is no Gibraltar IHT.
Transfer to a Malta QROPS
Transferring to a Maltese QROPS for non-UK residents (5 years +) can alleviate UK tax on payments (at up to 45%). Where the Malta Israel DTA applies there should be tax payable only in Israel, potentially this could be at rates up to 48% for tax residents. However, if an Israeli tax exemption is satisfied (e.g. First Time Israeli Resident), this could result in no tax in Malta and no tax in Israel. There is a risk of the DTA Limitation of Benefit Article applying, if the main purpose or one of the main purposes of the transfer was to obtain exemption benefits under the DTA. If applicable, Maltese tax may be due up to 35%. For non-Israeli residents, foreign pension income remitted to Israel would not be taxable in Israel but Maltese tax up to 35% may be due on such income depending on country of residence. Furthermore, the QROPS can protect from the UK death benefit charges if non-UK resident (5 years +) and there is no Maltese IHT.
From 6 April 2006 a single set of rules came into effect. Under this system, the tax treatment for all types of approved schemes, including occupational schemes, small self-administered schemes, personal pensions, self-invested pension plans and retirement annuity contracts have been amalgamated into the rules for Registered Pension Schemes. These can be either Defined Benefit or Defined Contribution (DC) Schemes.
There is a DTA between the UK and Israel. This DTA provides that UK pension or UK annuity income paid to a tax resident of Israel, who is taxable on such income in Israel, shall be exempt from UK tax on such income. It should be noted that under the new version of the DTA, which was initially signed between the countries on 2 April 2009 but not ratified, the condition according to which the income has to be subject to tax in Israel in order to be tax exempt in the UK has been cancelled, but this DTA has not been ratified and it is unlikely that it will be ratified in the near future due to political disagreements.
Therefore if you satisfy the First Time Israeli Resident 10 year exemption, or Veteran Returning Resident 10 Year Tax exemption, or the Returning Resident 5 year exemption, then under the current DTA the UK Government will refuse to allow the pension income to be paid gross during the years the income is exempt from tax in Israel and will deduct UK tax (at up to 45%). It should be noted that a resident satisfying these tax exemptions may choose to be subject to tax in Israel during the exemption period with respect to all or part of his/her foreign source income. In such a case, the individual will be subject to tax in Israel with respect to his/her foreign pension income for this DTA purpose. There are separate provisions for Government Service Pensions.
Gibraltar has no DTA with Israel, therefore the QROPS pension payments to you would be taxable in Gibraltar, currently at a rate of 2.5%, and potentially in Israel (see Israeli tax position).
No UK income tax if non-UK resident(for 5 tax years + or total withdrawals are below £100,000).
No Gibraltar Inheritance Tax.
Protection from UK IHT.
Protection from UK death benefit charges, if non-UK resident (and non-UK resident for last 5 years + before payment).
Malta has a DTA with Israel, this provides that Maltese pensions and other similar remuneration paid in consideration of past employment to a resident of Israel shall be taxable only in Israel. In general, pensions not paid in consideration of past employment would also only be taxable in Israel under the Other Income Article. This is important, as we understand that the Maltese Tax Authorities do not currently treat pensions
from QROPS as “paid in consideration of past employment”. Therefore the QROPS pension payments should be taxable in Israel but not in Malta.
Individuals resident in Israel and satisfying the First Time Israeli Resident, Veteran Returning Resident, or Returning Resident tax exemptions should be treated as residents for the purposes of this DTA and therefore be entitled to claim benefits under it, i.e. no Malta tax and no Israel tax during exemption period.
There is separate provision for Government Service Pensions.
No UK income tax if non-UK resident(for 5 tax years + or total withdrawals are below £100,000).
No Maltese Inheritance Tax.
Protection from UK IHT.
Protection from UK death benefit charges, if non-UK resident (and non-UK resident for last 5 years + before payment).
From 6 April 2015, the UK tax treatment of benefits from DC schemes on death depends, amongst other things, on the age of the member at the time of death (i.e. pre or post 75). From this date, generally, there should be a lower UK tax cost on passing pension value to heirs on death. However, that said, there is still a possible current tax rate of up to 45%.
For those that are non-UK resident and have a QROPS the UK tax cost on succession can be less.
Residency and Taxation
In general, Israeli tax residents are taxed on their worldwide income.
Non-residents are taxed only on Israeli-source income, which is accrued or derived in Israel. They are not taxed on foreign income even if remitted.
Generally, for income tax purposes, an individual is deemed to be a resident if his/her centre of vital interests is in Israel. In addition, an individual will generally be considered an Israeli tax resident if either one of the following occurs:
Personal income is taxed at progressive rates up to 48%. A surcharge of 2% is levied on annual taxable income exceeding ILS 811,560 (approximately £139,000). Generally, the surcharge is levied on almost all types of income, including foreign source pension.
Foreign Pension Taxation
That said, the tax to be paid in Israel with respect to foreign source pension income shall not exceed the lower of certain criteria, including:
Where the QROPS is in Malta or Gibraltar, it should be noted that the tax ceiling provided under section 9C ITO (above) may not be available since the source of the pension payments is not in the former country of residence, but from a different country. However, taking into account the 35% exemption, the Israeli effective tax rate may be lower than the UK tax rate.
As stated previously, First Time Israeli Residents and Veteran Returning Residents (individuals who were Israeli tax residents in the past but have not been so for at least 10 consecutive years), are entitled to an exemption from tax in Israel for 10 years from the day they become Israeli tax resident with respect to certain income generated or received from foreign sources, including foreign pension income. In addition, Returning Residents (individuals who were Israeli tax residents in the past but have not been so for at least 6 consecutive years) are entitled to an exemption from tax in Israel for 5 years from the day they become Israeli tax resident with respect to certain income generated or received from foreign sources, including foreign pension income.
As indicated, First Time Israeli Residents, Veteran Returning Residents and Returning Residents may choose to be subject to tax in Israel during the exemption period with respect to all or part of their foreign source income.
It may be possible for this exemption period to be extended by a further 10 years, provided that certain investment criteria are fulfilled and approval is obtained from the Minister of Finance.
Foreign pension income is therefore taxable on tax residents unless such income qualifies for the above tax exemptions.
A foreign tax credit would be available in Israel for any Gibraltar tax paid on the pension income if the income is also taxable in Israel.
It should be noted that a possible risk exists if QROPS are not seen by the Israeli Tax Authority as a pension fund but rather as a foreign company or a transparent entity. Such classification might lead to income accrued by the QROPS to be taxed on the beneficiary while the income is accrued in the QROPS rather than only at the point of payment of pension income.
Israel has signed more than 50 DTAs, including with the UK and Malta.
Inheritance, estate taxes and net wealth taxes are not imposed in Israel.
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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.
