EIM75450 - The taxation of pension income: temporary non-residence provisions

Overview
Meaning of temporary non-residence
When pension is taxed – return to the UK on or after 6 April 2015
Relevant withdrawals – return to the UK on or after 6 April 2015
When pension is taxed – return to the UK before 6 April 2015
Relevant withdrawals – return to the UK before 6 April 2015

Overview

When an individual returns to the UK after a period of temporary non-residence they may be charged to tax on pension income they received during the period of temporary non-residence.

The temporary non-residence provisions apply to individuals who after 5 April 2011 return to the UK after a period of temporary non-residence.

If the temporary non-residence provisions apply to an individual, certain pension and lump sum payments (called relevant withdrawals) made under a:

  • registered pension scheme
  • relevant non-UK scheme (RNUKS)

are treated as accruing or arising in the period of return to the UK. This means that payments that otherwise would not be taxed because the individual is non-resident are charged to tax in the tax year in which the individual returns to the UK.

Section 579CA ITEPA 2003 sets the temporary non-resident conditions and modifies the operation of the charging provision for pensions under a registered pension scheme at section 579B. Section 576A ITEPA 2003 sets the temporary non-resident conditions and modifies the operation of the charging provision for foreign pensions at section 575.

EIM75470 provides some examples of the operation of the temporary non-residence rules.

The definition of temporary non-residence used depends on whether the individual left the UK before 6 April 2013 or on or after 6 April 2013 – see Meaning of temporary non-residence below.

The conditions that must be met for relevant withdrawals to be treated as accruing or arising in the period of return to the UK depend on whether the individual returned to the UK before 6 April 2015 or on or after 6 April 2015.

For individuals returning to the UK on or after 6 April 2015 there is a larger number of payments that are classed as ‘relevant withdrawals’, but payments below a certain limit are not caught by the temporary non-residence provisions.

For individuals who returned to the UK before 6 April 2015 there are fewer types of payment that are ‘relevant withdrawals’ but every relevant withdrawal is caught by the temporary non-residence provisions.

Relevant non-UK scheme (RNUKS)

The term ‘relevant non-UK scheme’ is set by paragraph 1(5) schedule 34 FA 2004. PTM113210 provides guidance on the definition of an RNUKS, but broadly it is a foreign pension scheme that has benefitted from at least one of the following UK tax reliefs:

  • on contributions
  • funds transferred in from a registered pension scheme
  • under section 307 ITEPA 2003.

Meaning of temporary non-residence

The legislative definition of temporary non-residence depends on when the individual left the UK. As a result of the introduction of the statutory residence test, sections 576A and 579CA ITEPA 2003 were rewritten for individuals who left the UK on after 6 April 2013. The definitions are similar but not identical.

Departure from the UK on or after 6 April 2013

Sections 576A(8) and 579CA(6) ITEPA 2003

For individuals who left the UK on or after 6 April 2013 and then returned, the relevant legislation is section 576A or 579CA as inserted by paragraph 116 or 117 schedule 45 Finance Act 2013. This version of sections 576A and 579CA was amended by paragraphs 83 and 81 of schedule 1 Taxation of Pensions Act 2014 with effect from 6 April 2015.

For individuals who left the UK on or after 6 April 2013 the meaning of temporary non-residence is defined by the statutory residence test. The section of the Residence, Domicile and Remittance Basis Manual starting at RDRM12600 provides guidance on the general temporary non-residence rules. For guidance on the meaning of:

Departure from the UK before 6 April 2013

Sections 576A(2) and (3), 579CA(2) and (3) ITEPA 2003

For individuals who left the UK before 6 April 2013 and then returned, the relevant legislation is section 576A or 579CA as inserted by paragraph 21(4) or 22(3) schedule 16 Finance Act 2011. This version of sections 576A and 579CA was amended by paragraphs 84 and 82 of schedule 1 Taxation of Pensions Act 2014 with effect from 6 April 2015.

An individual was a temporary non-resident if:

  • they were tax resident in the UK during at least 4 of the 7 tax years immediately before the tax year of departure
  • immediately following the year of departure, they were non-UK tax resident for less than 5 tax years
  • they returned to the UK and became UK tax resident.

The year of departure is the last tax year before leaving the UK in which the individual was UK tax resident.

An individual is UK tax resident for a tax year if they are treated as UK tax resident during any part of that year under the normal tax rules and they are not ‘treaty non-resident’ during any part of that year. An individual is ‘treaty non-resident’ at any time if, at that time, they are regarded as resident outside the UK for the purposes of a double taxation agreement in effect at that time.

When pension is taxed – return to the UK on or after 6 April 2015

Sections 576A and 579CA ITEPA 2003

For individuals returning to the UK after 5 April 2015, relevant withdrawals made under a registered pension scheme or RNUKS will be treated as if they accrued in the period of return if certain conditions are met.

For relevant withdrawals made under a registered pension scheme to be treated as such, the total of the individual’s relevant withdrawals under a registered pension scheme and certain relevant withdrawals under an RNUKS (the first 6 types in the list below) made in the temporary period of non-residence must be more than £100,000.

  • For relevant withdrawals made under an RNUKS to be treated as such, the total of all the individual’s relevant withdrawals under an RNUKS and relevant withdrawals under a registered pension scheme made in the temporary period of non-residence must be more than £100,000
  • To establish if total relevant withdrawals are more than £100,000, any payment made in a currency other than sterling is to be converted into sterling using the average exchange rate for the year ending 31 March in the tax year in which the relevant withdrawal was paid.

This means that payments that otherwise would not be taxed because the individual is non-resident are charged to tax in the tax year in which the individual returns to the UK. In effect, section 576A modifies the operation of the charging provision for foreign pensions at section 575 and section 579CA modifies the operation of the charging provision for pensions under a registered pension scheme at section 579B.

EIM75470 provides some examples of the operation of the temporary non-residence rules.

Double taxation agreements

Sections 576A(7) and 579CA(5) ITEPA 2003

Nothing in any double taxation relief arrangements is to be read as preventing either:

  • an individual being chargeable to Income Tax in respect of relevant withdrawals treated as accruing in the period of return
  • a charge to that tax from arising as a result

This means that any exemption specifically given under an agreement between the UK and another taxing state will not be taken into account in arriving at any UK tax liability.

Amount of tax due

Sections 576A(2) and 575(2), 579CA(2) and 579B, 683(3) and (3B) ITEPA 2003
Paragraph 2(6) and 2(7) schedule 3 Finance Act 2017

For payments under a registered pension scheme the taxable amount is the full amount of the relevant withdrawal treated as accruing in the period of return. Unlike other pension payments form a registered pension scheme, PAYE does not apply. PAYE cannot be operated as tax becomes due after the pension is paid.

For payments under an RNUKS the taxable amount treated as arising in the period of return depends on when the individual returned to the UK and when the relevant withdrawal was actually paid.

If the period of return is before 2017 to 2018 the taxable amount is 90% of the relevant withdrawal treated as arising in the period of return.

If the period of return is 2017 to 2018 or a later tax year, the taxable amount of the relevant withdrawal is:

  • the full amount of the relevant withdrawal where it is paid on or after 6 April 2017
  • 90% of the relevant withdrawal where it is paid before 6 April 2017

Individuals subject to the remittance basis

Section 576A(5) ITEPA 2003

For individuals subject to the remittance basis in accordance with section 809B, 809D or 809E Income Tax Act 2007, any relevant withdrawal from an RNUKS that was remitted to the UK in the temporary period of non-residence is treated as remitted to the UK in the period of return. In effect, the scope of the charge is limited to the appropriate payments that were remitted to the UK in a year of non-residence. The taxable amount is the full amount of the relevant withdrawal remitted to the UK.

Relevant withdrawals – return to the UK on or after 6 April 2015

Relevant withdrawals are certain types of pension and lump sums paid under a registered pension scheme or an RNUKS that are both:

  • paid to the taxpayer during the period of non-residence
  • not chargeable to tax under Part 9 ITEPA as pension income (or would not be if a double taxation relief claim were made)

Relevant withdrawals from a registered pension scheme

Section 579CA ITEPA 2003

From 6 April 2015 the following payments from registered pension schemes can be relevant withdrawals:

  • member’s drawdown pension (either as income withdrawal or short-term annuity) paid from or in respect of a member’s flexi-access drawdown fund (see PTM062710 for more information about drawdown pensions)
  • dependants’ drawdown pension (either as dependants’ income withdrawal or dependants’ short-term annuity) paid from or in respect of a dependant’s flexi-access drawdown fund (see PTM072410 for more information about dependants’ drawdown pensions)
  • nominees’ or successors’ drawdown pension (either as nominees’ income withdrawal or nominees’ short-term annuity) paid from or in respect of a nominee’s or successor’s flexi-access drawdown fund (see PTM072410 for more information about these types of pension)
  • the taxable part of an uncrystallised funds pension lump sum (see PTM063300)
  • payments made before 6 April 2015 of either member or dependants’ income withdrawal that was paid under a flexible drawdown arrangement (see PTM062580 and PTM072330 for more information about flexible drawdown)
  • payment of lifetime or dependants’ annuity to which the individual became entitled on or after 6 April 2015 that is a flexible annuity; an annuity is a flexible annuity where the terms of the annuity contract allow actual or possible decreases in the amount of the annuity (other than those allowable under a normal lifetime or dependants’ annuity)
  • payment of a scheme pension (see PTM062310 for payment conditions) or dependants’ scheme pension (see PTM072100 for payment conditions) under a money purchase arrangement that the individual became entitled to on or after 6 April 2015 when fewer than 11 other individuals were also entitled to the present payment of a scheme pension under the scheme
  • payment of a lump sum death benefit made on or after 6 April 2016 that is taxable as pension income (see EIM75620).

Relevant withdrawals from an RNUKS

Section 576A ITEPA 2003
Paragraph 5A schedule 34 Finance Act 2004

From 6 April 2015 the following payments from an RNUKS are relevant withdrawals:

  • a payment that if made from a registered pension scheme would be drawdown pension (either as income withdrawal or short-term annuity) paid from or in respect of a member’s flexi-access drawdown fund
  • a payment that if made from a registered pension scheme would be dependants’ drawdown pension (either as income withdrawal or short-term annuity) paid from or in respect of a dependant’s flexi-access drawdown fund
  • a payment that if made from a registered pension scheme would be nominees’ or successors’ drawdown pension (either as nominees’ income withdrawal or nominees’ short-term annuity) paid from or in respect of a nominee’s or successor’s flexi-access drawdown fund
  • payments made before 6 April 2015 that if made from a registered pension scheme would be either member or dependants’ income withdrawal that was paid under a flexible drawdown arrangement
  • a payment of an annuity that if purchased after 5 April 2015 using registered pension scheme funds would be a lifetime annuity or dependants’ annuity that is a flexible annuity; an annuity is a flexible annuity where the terms of the annuity contract allow actual or possible decreases in the amount of the annuity (other than those allowable under a normal lifetime or dependants’ annuity)
  • a payment under a money purchase arrangement, that if the scheme was a registered pension scheme, would be a scheme pension to which the individual became entitled to after 5 April 2015 when fewer than 11 other individuals were also entitled to the present payment of a scheme pension
  • a payment that is subject to a member payment tax charges (see PTM113210) where tax would be payable but for the operation of a double taxation agreement

A payment made under an RNUKS is a relevant withdrawal only if the payment is attributable to an individual’s UK funds, that is either a:

  • UK-relieved fund
  • relevant transfer fund
  • ring-fenced transfer fund

PTM113210 provides guidance on the meaning of these terms.

When pension is taxed – return to the UK before 6 April 2015

For individuals who return to the UK after 5 April 2011 but before 6 April 2015 any relevant withdrawal paid under a registered pension scheme or RNUKS is treated as accruing or arising in the year of return to the UK.

Note that unlike the period from 6 April 2015 there is no minimum amount before the temporary non-residence rules take effect.

For individuals subject to the remittance basis in accordance with section 809B, 809D or 809E Income Tax Act 2007 any relevant withdrawal from an RNUKS that that was remitted to the UK in the temporary period of non-residence is treated as remitted to the UK in the period of return.

The guidance relating to the operation of double taxation agreements and the amount subject to tax under the section When pension is taxed – return to UK on or after 6 April 2015 also applies here.

Relevant withdrawals – return to the UK before 6 April 2015

Sections 576A and 579CA ITEPA 2003

For individuals who return to the UK after 5 April 2011 but before 6 April 2015, certain payments are relevant withdrawals if they are both:

  • made to the taxpayer during the period of non-residence
  • not chargeable to tax under Part 9 ITEPA as pension income (or would not be if a double taxation relief claim were made).

The types of payment that may be relevant withdrawals are:

  • income withdrawal paid from a flexible drawdown arrangement (see PTM062580 for more information about flexible drawdown)
  • dependants’ income withdrawal paid from a flexible drawdown arrangement (see PTM072330 for more information about dependants’ flexible drawdown)
  • a payment from an RNUKS that if made by a registered pension scheme would be a member’s or dependants’ income withdrawal paid from a flexible drawdown arrangement, but only if the payment is attributable to an individual’s UK-relieved fund or relevant transfer fund - PTM113210 provides guidance on the meaning of these terms