EIM75470 - The taxation of pension income: temporary non-residence examples

Example of temporary non-residence on return to the UK before 6 April 2015
Example of temporary non-residence on return to the UK on or after 6 April 2015

Example of temporary non-residence on return to the UK before 6 April 2015

Section 579CA ITEPA 2003

This example follows the temporary non-residence guidance at EIM75450.

Bob is 56 and has lived all his life in the UK. On 5 August 2011 Bob leaves the UK for a 3-year contract of employment abroad.

Bob resumes tax residence in the UK on 2 September 2014.

Bob is paid £20,000 as a tax-free pension commencement lump sum and £60,000 in flexible drawdown from his UK registered pension scheme on 20 April 2012. Bob is not resident in the UK for tax year 2012 to 2013. So, in accordance with the terms of the double taxation agreement between the UK and the country in which Bob is resident at the time, no Income Tax is deducted or due in respect of the £60,000 paid as flexible drawdown.

Temporary non-residence test

As Bob left the UK in August 2011 the test for temporary non-residence is the test for individuals who leave the UK before 6 April 2013. Bob was temporarily non-resident as:

  • there was at least one tax year immediately prior to the year of return (2014 to 2015) when he was not tax resident in the UK (the intervening years: 2012 to 2013 and 2013 to 2014) and immediately prior to that there were earlier tax years of UK residence (all those to 2011 to 2012 inclusive).
  • The intervening years are less than 5 full tax years.
  • His year of departure is 2011 to 2012 and he had been resident in the UK for at least 4 out of the 7 tax years immediately prior to his year of departure (in this example he was resident for all of the previous tax years).

The flexible drawdown was paid in a year of non-residence (not in the year of departure or year of return) and is not, apart from section 579CA, otherwise chargeable to tax under Part 9 ITEPA.

Relevant withdrawals

As Bob returned to the UK in September 2014 the provisions relating to return prior to 6 April 2015 apply. The pension commencement lump sum is not a relevant withdrawal. The £60,000 flexible drawdown payment is a relevant withdrawal. There is no requirement for a minimum amount of relevant withdrawals. Bob will be chargeable under Section 579CA in the tax year of return to UK residence (2014 to 2015) on the £60,000 paid as flexible drawdown.

Example of temporary non-residence on return to the UK on or after 6 April 2015

Sections 576A and 579CA ITEPA 2003

This example follows the temporary non-residence guidance at EIM75450.

Joseph has lived in the UK all his life and has built up pension savings under 2 registered pension schemes. In 2014 Joseph transfers all his funds (£500,000) from one of these schemes to BusyBees QROPS. The transfer means that the QROPS is a relevant non-UK scheme (RNUKS) and Joseph has a ‘relevant transfer fund’ of £500,000 under the BusyBees QROPS.

Following that transfer Joseph has pension savings of £150,000 remaining in a registered pension scheme – the SupaDupa Scheme.

In March 2019 aged 60 Joseph leaves the UK to live abroad.

In 2019 to 2020 Joseph:

  • is paid £145,000 as the equivalent of a pension commencement lump from the BusyBees QROPS
  • designates his remaining funds under the BusyBees QROPS (£435,000) to provide drawdown pension under the equivalent of a flexi-access drawdown fund
  • withdraws £90,000 from his flexi-access drawdown fund (this is the equivalent of drawdown pension).

In 2020 to 2021 Joseph takes £112,000 held under the SupaDupa Scheme as an uncrystallised funds pension lump sum.

In accordance with the terms of the double taxation agreement between the UK and the country in which Joseph is resident at the time, none of these payments were charged to tax in the UK.

In June 2021 Joseph returns to the UK.

Temporary non-residence test

As Joseph left the UK in 2018 to 2019 the test for temporary non-residence is for those departing on or after 6 April 2013. This is set by the statutory residence test provisions of Part 4 schedule 45 Finance Act 2013. Joseph’s circumstances appear to meet the conditions for the temporary non-residence rules because:

  • before leaving the UK in 2018 to 2019 Joseph had been resident in the UK for at least 4 out of the 7 tax years immediately prior to his year of departure (in this example he was resident for all of the previous 7 years).
  • Joseph resumed UK residence in 2021 to 2022, and the period between departing and returning to the UK is not more than 5 years.

Relevant withdrawals

As Joseph returned to the UK in 2021 to 2022 the provisions relating to returning to the UK on or after 6 April 2015 apply. There is a wider range of payments that may be relevant withdrawals, but pension income is treated as accruing in the period of return only if more than £100,000 has been paid in the period of temporary non-residence.

The £145,000 equivalent of a pension commencement lump sum is not a relevant withdrawal. It is not on the list of types of payments that can be relevant withdrawals at section 576A(4).

The £90,000 equivalent of drawdown pension paid from the BusyBees QROPS in 2019 to 2020 is a relevant withdrawal as:

  • the drawdown pension was taken as income withdrawal so is on the list of types of payment that are relevant withdrawals (section 576A(4)(a))
  • it was paid in the period of temporary non-residence and was not chargeable to UK tax in 2019 to 2020
  • the payment is referable to Joseph’s relevant transfer fund under the BusyBees QROPS.

This is the only relevant withdrawal from the BusyBees QROPS during the period of temporary non-residence. So, the total relevant withdrawals from the RNUKS during the period of temporary non-residence is only £90,000.

In 2020 to 2021, during his period of temporary non-residence, Joseph was paid £112,000 as an uncrystallised funds pension lump sum (UFPLS) from the SupaDupa Scheme. This is a relevant withdrawal as:

  • an UFPLS is on the list of relevant withdrawals under a registered pension scheme at section 579CA(4)(i)

  • it was paid in the period of temporary non-residence and was not chargeable to UK tax in 2020 to 2021, in accordance with the terms of the double taxation agreement between the UK and the country in which Joseph was resident at the time.

The amount of the relevant withdrawal from the SupaDupa Scheme is the taxable portion of the UFPLS. The taxable amount of the UFPLS is £84,000 (25% of the £112,000 UFPLS is tax-free).

The total relevant withdrawals from registered pension schemes during the period of temporary non-residence is £84,000.

However, the test of whether or not relevant withdrawals are more than £100,000 looks at the total of payments from both RNUKS and registered pension schemes. The total relevant withdrawals from both RNUKS and registered pension schemes during the period of temporary non-residence is £174,000 (£90,000 + £84,000). As this is more than £100,000 under the temporary non-residence provisions of sections 576A and 579CA, £174,000 is treated as accruing on Joseph’s period of return and is charged to UK tax.