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’ – either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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, than non-UK residents are liable to pay UK income tax on those earnings as is the case for earnings of UK residents. If you have a pension in the UK, this is counted as UK source income and so you are taxed at your marginal rate on the 75% that is not included in your tax free sum.
However, 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 – choosing instead to pay tax where you are resident.
A DTA between Italy and the UK does exist. This means that UK employee pension holders resident in Italy pay tax in Italy and are not taxed at source in the UK.
Pensions unconnected to past employment (e.g. SIPPs) should also be taxed only in Italy (Other Income Article provision of the DTA). UK tax may apply if the income is paid out of trusts.
Government Service Pensions are treated a little differently.
Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age. Passing pensions onto beneficiaries is now, in general, less costly. Marginal tax rates are still up to 45%.
Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die.
Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with Italy. UK income tax does not apply if the person has been non-resident for 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 5 years previously, a UK resident.
A DTA exists between Malta and Italy meaning that annuities and payments providing a pension from past employment are taxed in the country of residence. QROPS pensions are taxed based on Italian residency and not in Malta as QROPS are not considered by Malta as “paid in consideration of past employment”. Government Service and Social Insurance Pensions are slightly different.
UK income tax does not apply if the person has been non-resident for 5 years or more 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 5 years previously, a UK resident.
Italian tax residents are taxed on income sourced worldwide.
Those not resident in Italy are taxed on income sourced in Italy only. Foreign income, remitted or not, is not taxed. Foreign pensions are treated similarly for non-residents except if paid by an Italian ‘permanent establishment’ of a non-resident, the State (Italy), or paid by an Italian resident.
A resident for tax purposes includes those habitually resident or domiciled in Italy (183 day per year minimum) or registered at the Italian Civil Registry. The highest income tax bracket is 43%. Municipal and regional taxes also apply at varying rates but normally totalling a maximum of 2.5%. In cases where income exceeds €300,000, 3% solidarity surcharge is levied.
Foreign income (including lump-sums from pensions) is taxed for residents. The employment and associated income section of the Annual Tax Return in Italy provides for foreign income declaration. The standard Italian progressive tax applies.
Foreign pension lump-sums are classed as “employment/pension” income and subject to the marginal rate in Italy. Italian pension lump-sums are afforded special benefits but this does not apply to foreign pensions.
Both lump-sums and payments from a foreign pension are subject to tax in Italy (for residents) no matter the UK allowance and benefits.
Italy has 90 DTAs in place including the UK and Malta but not with Gibraltar. However, the Italian Tax Code states that income sourced abroad that is subject to tax in both Italy and the foreign jurisdiction, receives tax relief. This amounts to the total 2.5% income tax for Gibraltar.
The Italian Financial Monitoring Regime requires special disclosure on offshore assets and wealth taxes apply to some of these assets. This wealth tax is referred to as IVAFE and for Italian residents, a 0.2% tax applies on these assets. Foreign held complimentary pensions are excluded from this as long as they are managed by non-Italian entities. Assets not declared may be forfeited.
Residents of Italy must declare the amount held in their foreign pension but pay no wealth tax on it.
Inheritance tax, estate tax and gift tax are charged if the testator is resident in Italy or if the assets to be bequeathed or gifted are in Italy.
Taxes are levied on the recipient at 4%-8% depending on the closeness of their relationship. Spouses and children can benefit from a €1 million allowance on which no inheritance/gift tax is paid but the relationship between UK and Italian law in respect to inheritance demands specific advice to be sought in this respect.
Leave the Pension in the UK
If the requirements of the DTA are satisfied, than no UK tax applies. If resident in Italy, tax is levied up to 45.5%. Non-Italian residents do not need to pay tax on foreign pensions. UK tax may apply to non-residents in Italy. Wealth tax requires special attention in the Italian Annual Tax Return but foreign complimentary funds are not charged wealth tax. 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 an Italian resident, up to 45.5% in Italy also. An Italian tax credit applies to mitigate the Gibraltar tax. For non-Italian residents, no Italian tax is due on income from foreign pensions. As with the previous option, wealth tax requires special attention in the Italian Annual Tax Return but foreign complimentary funds are not charged wealth tax. 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 DTA with Italy means that, for Italian residents, no Malta tax applies as the tax is levied according to Italian tax law (up to 45.5%). Although no Italian taxes on the pension will be incurred for non-residents of Italy, taxes in Malta (up to 35%) may be levied. Wealth tax (for Italian residents) requires special attention in the Italian Annual Tax Return but foreign complimentary funds are not charged wealth tax. The QROPS protects from inheritance tax in the UK (also ‘0’ rate in Malta) and assuming 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.