If you are an expat and a tax resident in Sri Lanka 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offered to pension holders in April 2015 meaning that in most ‘defined contribution’ cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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 the UK and Sri Lanka stipulates that any UK pensions including annuities income is taxed in Sri Lanka if the individual is a resident there, not in the UK.
Government pensions are treated a little differently. Professional international pension advice should be sought in all cases of international pension transfer. Your international adviser should be able to assist with this issue among others. Government Service Pensions are treated a little differently.
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 Sri Lanka. 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. Sri Lanka and Malta have no DTA in place so pensions (QROPS) will be taxed in Malta at up to 35%.
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.
Sri Lanka taxes its residents on a worldwide income basis. If a non-resident is provided income from a source within Sri Lanka, then this too will be taxed in Sri Lanka. Those same non-residents of Sri Lanka are not liable to tax on income from sources elsewhere. If the individual spends 183 days or more during the tax year (not necessarily consecutive) in Sri Lanka, then they qualify as a resident.
If an individual has dual Sri Lankan nationality or is employed (not as a Sri Lankan national) in Sri Lanka, then they are not obliged to pay income tax on worldwide income, only Sri Lankan-sourced income. Dual Sri Lanka citizens are not taxed on income from outside of Sri Lanka if they have permanent residency in another country. This also applies to resident citizens as long as the income is remitted through a bank in Sri Lanka. This rule applies to foreign pensions remitted to ‘resident citizens’.
This represents an important exemption from the rule that pension income is counted as taxable income.
Lump-sums and regular payments are treated similarly under Sri Lankan tax law. The UK 25% lump-sum, for instance, would not be taxed as long as it hadn’t arisen in any way from Sri Lanka or with regards to employment in Sri Lanka.
Individuals who are both tax residents and citizens of Sri Lanka are provided the tax free benefits if the income has not arisen in Sri Lanka and it is remitted via a bank in Sri Lanka.
The highest progressive rate of tax is 16%.
Sri Lanka will offer tax credits if it is to tax foreign income from pensions but this is a provision of a DTA which does not exist between Gibraltar and Sri Lanka or Malta and Sri Lanka. Therefore double taxation is a possibility in these cases.
Contributions to a foreign pension scheme cannot be offset against tax in Sri Lanka.
Personal schemes, occupational schemes and annuities are treated similarly from a tax perspective in Sri Lanka. No other Sri Lankan taxes apply including net wealth, net worth, gift or inheritance taxes.
Sri Lanka has approximately 38 DTAs in place.
Leave the Pension in the UK
If the pension stays put in the UK, and the individual is a resident of the Sri Lanka, then UK taxes should be substituted for the Sri Lankan tax of up to 16%. Full UK taxes of up to 45% are due if the income is not subject to tax in Sri Lanka. Death benefit charges still apply to funds in the UK.
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 potentially be tax exempt in Sri Lanka. If there is no tax exemption, the income will be taxed at up to 16% in Sri Lanka after 2.5% taxation in Gibraltar. The QROPS protects from UK 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 member will pay up to 35% in Malta and zero tax in Sri Lanka if the payments fit into the exemption. If the individual does not meet the exemption requirements in Sri Lanka, up to 16% can be charged after Malta tax (51%). 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.