The new tax treatment of foreign pensions and double tax treaties

October 14, 2011

Under most of the UK's Double Tax Treaties, a foreign pension (including a pension lump sum) paid to a UK resident is taxable in the UK. In certain cases where the UK and the other country tax pensions differently, the tax treaty provides that a pension or lump sum is taxed solely in the country where the pension arises. HM Treasury confirmed its plans, originally announced on 6 April 2011, to remove the right for UK residents who receive a pension and/or a lump sum from foreign pension schemes to take advantage of a double taxation agreement and receive such payments tax free. Previously, where a UK resident transferred his pensions savings abroad, double taxation agreements meant that only the tax regime of the host country would apply. However, provisions in the Taxation (International and Other Provisions) Act 2010 (currently in draft form) will ensure that UK residents are still liable to a UK tax charge, with effect from 6 April 2011. The legislation applies to a pension and/or a lump sum that:

Arises outside of the UK;

Is paid to a UK resident;

Is not subject to UK taxation due to a double taxation agreement;

Relates to a transfer from a pension scheme to the overseas scheme from which the payment is made;

Is part of a 'tax avoidance scheme', ie. where one of its main purposes of the transfer is to secure an income tax advantage under a double taxation agreement. The idea behind this to prevent double tax treaties being used to avoid UK tax on foreign pensions paid to UK residents where pension savings have been transferred to a pension scheme outside the UK. The changes above ensure that UK residents cannot take advantage of the provisions in one of the UK's DTAs to avoid UK tax on their pension or lump sum. However, there will still be a tax credit available against the UK tax chargeable if tax is paid in the country where the pension or lump sum arises.

The new tax treatment of foreign pensions and double tax treaties

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