Tribunal rules expat’s pension withdrawals were tax-free

A first-tier tribunal found that an individual’s pension withdrawals made from his UK pension while resident in Portugal were tax-free.

On August 11, the tribunal accepted the appeal of Trevor Masters in his case against HMRC.

The appeal related to the interpretation and application of the UK-Portugal Double Tax Convention – more specifically if withdrawals from Masters’ Sipp, paid to him whilst he was resident in Portugal and non-resident in the UK, were taxable in the UK or Portugal.

£6mn pension transfer

Masters worked at Tesco for 32 years and amassed a DB pension pot of nearly £6mn, which he transferred from the Tesco pension scheme to a Sipp in 2016.

In 2019 Masters left the UK and moved to Portugal under the Non-Habitual Resident (NHR) regime.

The regime (which has since been replaced with NHR 2.0) allowed individuals to benefit from certain tax exemptions in Portugal for a 10-year period, including for non-Portuguese pension income to be exempt from tax.

In the 2019-20 tax year, more than £3.5mn was withdrawn from the Sipp and was subject to UK tax of around £1.5mn.

One of the key areas of focus in the case was whether the pension payments were “paid in consideration of past employment”.

Article 17 of the UK-Portugal Double Tax Convention, says: “Any pensions and other similar remuneration . . . paid in consideration of past employment to a resident of a contracting state and any annuity paid to such a resident shall be taxable only in that state.”

However, HMRC argued the payments received by Masters from his Sipp were not pensions or other similar remuneration paid “in consideration of past employment”.

In addition to this, the payments did not fall within Article 20 of the UK-Portugal Double Tax Convention, because they were not income on which Masters was “subject to tax” in Portugal.

HMRC argued that by undertaking the DB transfer to a Sipp the pension had lost enough of its connection to the original employment and could therefore be taxed in the UK.

Rachel de Souza, tax partner at RSM UK, explained: “If that was the case, it could have far-reaching consequences for many expats who had moved overseas and similarly undertaken a transfer of their old workplace pension, as many of the UK’s double tax treaties with other countries have similar wording.

“These principles also apply to transfers from defined contribution occupational pensions to Sipps, which often occur as individuals consolidate their pension pots.”

Tribunal’s decision

The tribunal ultimately disagreed with HMRC’s stance as it found in Master’s case the pension funds largely originated from their previous employment and that the transfer to the Sipp did not break the causal link to that employment.

No further contributions were made to the Sipp following the end of the Master’s employment with Tesco and so the tribunal concluded the pension was “paid in consideration of past employment”.

Therefore, the pension payments were only taxable in Portugal under the tax treaty and the UK tax withheld at source should be repaid.

De Souza said: “In practice, we have seen HMRC simply accept some applications for relief under double tax treaties where funds have been transferred from an occupational pension to a Sipp.

“In other cases, HMRC has not accepted that the Sipp funds are paid in consideration of past employment. Thus, this judgment provides welcome clarification of the principles.”

As a result of Masters winning his appeal, the tribunal did not need to consider whether the pension payment was still theoretically “subject to tax” in Portugal under Article 20.

De Souza said the outcome of this case would come as a relief to taxpayers who have retired overseas and plan to draw their pensions, or have already done so.

“While the news may initially appear positive, taxpayers shouldn’t assume that their own pension will be free from UK income tax if drawn whilst they are non-resident.

“In many cases, the pension will still require a strong link to a past employment. As this case confirms, if someone receives a salary and then contributes this to a personal pension, rather than an occupational one, then that is unlikely to be a strong enough link to employment,” she added.

alina.khan@ft.com

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