A new double tax agreement (DTA) between the United Kingdom and UAE came into force on 1st January could offer major savings for those with pension funds. David Denton, the head of international technical sales at Old Mutual Wealth, said UAE residents older than 55, meaning expats and Arabian Gulf nationals with UK pensions are now free to cash out their entire UK pot tax free under the terms of the new DTA. He said most UK expats in the UAE are under 55, so the group of biggest beneficiaries may be GCC nationals who have built up pension savings while working in the UK. "They may be able to access the savings free of UK income tax when they retire in the GCC," he explained.
Currently, UK pensions are taxed when they are paid out as income, but for those who are living outside UK and where the jurisdiction in which they live has a double taxation treaty with the UK, only pay the local rate of tax.
Under UK "pension freedom" rules introduced in April 2015, savers of 55 and older can cash in their pension funds. On the other hand, UAE residents may be able to take their money free of UK income tax, provided that they comply with temporary non-residency rules designed to stop people avoiding tax by temporarily leaving the country.
“This is an interesting development which could persuade UK investors based in the UAE to take advantage of UK self-invested personal pensions schemes (Sipps) offering flexi access drawdown, and subsequently access the benefits in the UAE free of income tax. This is a surprising potential advantage of the UAE DTA agreement,” Denton told International Adviser.
Mr Denton said that in order to qualify typically one has to be resident abroad for at least five tax years in full. "However, with pensions you can normally take 25 per cent of your fund as tax-free cash, plus £100,000 (Dh456,710) on top, without meeting this timescale."
The DTA is designed to build closer trade relations, ease labor movement and prevent businesses and individuals from paying tax twice on the same money.
However, offshore tax experts warned that the new rules could backfire if people rushed to withdraw their pension funds without careful planning or understanding all the risks.
However, Mr Denton stated that "Pension funds are generally not subject to Inheritance Tax (IHT) on death but any withdrawals you do not spend will form part of your estate for IHT purposes." This means that wealthy individuals who may have a UK IHT liability they should plan accordingly and take carefully steps before taking money from their pension. Stuart Ritchie, a UK-regulated pension transfer specialist for AES International in Dubai, said that the new agreement is easing pension withdrawals, while HM Revenue and Customs (HMRC) is simultaneously clamping down on transfers into qualifying recognized overseas pension schemes (Qrops).
HMRC recently announced a new 25 per cent tax charge imposition on withdrawals for residents outside the European Economic Area – the EU plus Norway, Iceland and Liechtenstein. "It is possible the British government may seek to undo this new DTA easing in time but untying a bilateral treaty is not easy," said Mr Ritchie. Britons must still be careful if withdrawing pension funds. Mr Ritchie said: "If someone returned to live in the UK later, even temporarily, HMRC would very likely pursue them for tax." Mr Ritchie also said that "Wealthy expats should look to draw other forms of retirement income first, to reduce their IHT liability".
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