- March 3, 2023
- Posted by: Simon Huften
- Categories: Investing, QROPS, QROPS RRIF, QROPS RRSP
5 year rule is applicable to UK pensions transferred to QROPS in Canada
UK taxation could occur if you are still a UK resident within 5 years of making a withdrawal
This rule is in place to discourage tax avoidance
Always seek professional advice when transferring a UK pension to Canada
A Qualifying Recognized Overseas Pension Scheme (QROPS) is a type of overseas pension scheme that meets specific criteria set by the UK government. QROPS allows individuals who have built up a private UK pension to transfer it to an overseas pension scheme without facing a significant tax penalty. However, there are specific rules and regulations that must be followed when making such a transfer, and one of them is the 5-year rule.
5 Year Rule
The 5-year rule applies to transfers of UK pensions to QROPS based in Canada. Under this rule, if you transfer your UK pension to a Canadian QROPS and you are a UK tax resident within five complete tax years after the date of transfer, the transfer can potentially be subject to UK tax. This means that any pension income you receive from the QROPS within this period will be subject to UK income tax, regardless of where you are living when you receive the income. If you have been a Canadian resident for 5 years, you will not have to worry about this taxation.
Basically, you have to be a UK non-resident for 5 consecutive tax years before retiring or beginning to draw from your QROPS in Canada to avoid double taxation (taxation in the UK and Canada).
It’s worth noting that the 5-year rule only applies to transfers made on or after 9 March 2017. Transfers made before this date are not subject to the rule, but they may be subject to other tax regulations.
One of the reasons behind the introduction of the 5-year rule is to prevent UK residents from using QROPS as a tax avoidance strategy. If the rule did not exist, individuals could potentially transfer their UK pension to a QROPS based in Canada, move to Canada, and receive their pension income tax-free. The 5-year rule ensures that individuals cannot take advantage of this loophole.
It’s important to understand that the 5-year rule only applies to transfers to QROPS based in Canada. Transfers to QROPS based in other countries may be subject to different rules and regulations. Therefore, it’s crucial to seek professional advice before making any decisions regarding your pension transfer.
The 5-year rule also applies to individuals who have previously transferred their UK pension to a QROPS based in Canada but have since returned to the UK. If you return to the UK within five complete tax years after the date of transfer, any pension income you receive from the QROPS will be subject to UK income tax.
It’s essential to note that the 5-year rule does not apply to individuals who have become non-UK tax residents after making the transfer to a Canadian QROPS. If you are a non-UK tax resident and receive pension income from a Canadian QROPS, you will not be subject to UK income tax. However, you may be subject to tax in the country where you are resident, depending on the local tax laws.
In summary, the 5-year rule is a requirement that applies to transfers of UK pensions to QROPS based in Canada. If you are a UK tax resident within five complete tax years after the date of transfer, any pension income you receive from the QROPS can potentially be subject to UK income tax, regardless of where you are living when you receive the income. The rule was introduced to prevent individuals from using QROPS as a tax avoidance strategy.
If you are considering transferring your UK pension to a QROPS based in Canada or any other country, it’s crucial to seek professional advice to ensure you fully understand the tax implications of your decision.
If you are interested in learning more about transferring a pension scheme from the UK to Canada, please contact us today for a free, no obligation consultation.