Can my Sipp cross international borders?

Martin Reynard, senior pensions manager at tax and advisory firm Blick Rothenberg, says

The timing, form and UK taxation of retirement and death benefits settled from UK pension plans is determined by the fact they are UK pension plans. At a fundamental level, the tax residence of the beneficiary is irrelevant.

Residence will come into play if the beneficiary is tax resident elsewhere and the specific double tax agreement (DTA) that the UK has in place with the other country provides that the country of residence gets to tax pension benefits, rather than the country where the pension plan itself is based.

The current UK New Zealand DTA awards sole taxing rights of pensions and “similar remuneration” (conventionally accepted as including lump sums) to the country of residence.

You do not say how old you are or how your pension arrangements measure up against the so-called lifetime allowance (LTA). If you were to die before age 75 your pension funds within any remaining LTA would not be subject to UK tax, whether paid as a lump sum or drawn as income from a nominee’s drawdown account. 

Any pension fund in excess of the LTA will be:

• taxed at 55 per cent if paid as a lump sum;
• taxed at 25 per cent if transferred to a nominee’s drawdown account.

If you die at or after age 75, subject to any DTA provisions, your pension funds will be subject to UK income tax in the hands of the beneficiary at the point the beneficiary receives a lump sum or on any withdrawals taken from a nominee’s drawdown account.

The LTA excess tax charges are standalone tax charges and are not covered by any DTA. That is, the excess tax charges are paid regardless of residence. Your daughter will need to take tax advice locally on how the UK source lump sum or drawdown will be taxed in New Zealand.

It is the prerogative of any UK pension provider whether to offer a nominee drawdown account. Many are reluctant to offer a pension plan to a non-resident. You may be able to shop around and find a more co-operative UK pension provider. You need to be wary of transferring between providers if, at the time of transfer, you are in poor health and you subsequently die within two years of the transfer. HMRC has looked to charge UK inheritance tax (IHT) in this situation, although the Supreme Court’s 2020 ruling on “Staveley” makes this less likely, provided there is no change in the nominated beneficiaries between the old and new pension plans.

Being eligible for UK tax relief under a DTA does not mean that UK tax won’t be deducted from a lump sum or withdrawals if UK income tax is otherwise due (because you died at or after age 75). Such payments are made via pay as you earn (PAYE). However, once a payment has been made, your daughter will be able to apply to HMRC for treaty relief and, if that is accepted, HMRC will arrange for any UK tax to be refunded. In the case of a nominee drawdown plan, it will also issue a “nil tax code” to the pension provider so that subsequent withdrawals are not taxed as source.

In fairness to your platform, a UK Sipp provider’s tax compliance obligation is limited to UK requirements – assessing and deducting LTA tax charges, and operating PAYE on pension income. It is up to the taxpayer to deal with HMRC regarding wider issues such as claiming UK tax relief under a DTA.

It is important that you 'name names' if your Sipp provider is to have the flexibility to offer a nominee’s drawdown to a potential Sipp beneficiary and that you complete the Sipp provider’s nomination form or otherwise make your wishes clear. While a Sipp provider is able to offer a lump sum to any individual, nominee’s drawdown can, by definition, only be offered to people you have nominated. This is especially the case if you are survived by a widow, even if she is happy to waive her entitlement in favour of other family members.

You may wish to consider your wider IHT planning strategy given that, in most cases, the pension fund is free of IHT while other assets are not. Giving away the chargeable assets (taking into account any transaction costs such as capital gains tax and stamp duty land tax) may be more efficient in the round, keeping your pension to use for living expenses.

James Jones-Tinsley, self invested pensions technical specialist at Barnett Waddingham

I suspect the primary reason why you have been unable to obtain answers to your queries from both HMRC and your Sipp provider is because of difficulties in explaining the interaction between two different tax jurisdictions, in respect of UK pension tax rules.

Cross-border business rules

For beneficiaries to be offered a drawdown facility in the event of your prior death, the pension provider would usually have to set up a new policy for each beneficiary.

Where the beneficiary is resident overseas, the new policy would constitute ‘cross-border business’, and may require the pension provider to be licensed or regulated to transact business in the country that the beneficiary lives in.

There can also be complex rules around cross-border business that restrict the transactions the beneficiary would be able to carry out if they are not UK-resident. An example of this would be the prevailing rules for US residents, who are unable to carry out investment transactions within UK tax ‘wrappers’.

Keeping up-to-date with the different rules applying to all non-UK countries would be a massive overhead for the pension provider, and would incur significant costs that would probably have to be passed on to their policyholders.

Therefore, it is easier to limit the payment of overseas death benefits to lump sums, which would be treated as a payment under the original policy for the now-deceased UK resident.

In this situation, the beneficiary would have no policy, or specific rights, in relation to the lump sum payment, as its distribution would be at the discretion of the trustees of the UK-based pension scheme. 

International tax treaties (double taxation arrangements)

HMRC rules that determine whether the pension provider has to deduct UK income tax on payments are relatively straightforward.

However, you also need to consider the tax rules applying to the recipient in New Zealand and what tax treaties are in place between the UK and New Zealand, at the time payments are made.

Double taxation arrangements are intended to prevent people from paying tax twice on the same income.

If the recipient of a payment is required to pay tax on the payment in the country they are resident in, they should be able to either claim back any tax initially deducted in the UK, or apply to HMRC for a tax code to allow income payments to be made to them, without UK tax being deducted.

If they are not required to pay tax on the payment in the country they are resident in, then they will have to pay income tax in the UK.

The actual details will depend on the tax treaty in force at the time of the payment, and as this could change over time, it makes it extremely difficult to be specific on what the outcome could be.

For this reason, I would strongly suggest that your daughter engages with a New Zealand-based tax adviser, who specialises in that country’s tax rules, to assist in fulfilling your stated wish to, “…ensure that those in receipt of the Sipp suffer the least tax, and also know the correct steps to take to expedite the transfer of funds”.