The overseas transfer allowance was introduced to replace what was previously BCE8 – transfers to QROPS – and only applies to transfers that are otherwise outside the scope of the overseas transfer charge.
Unless some form of protection applies, the maximum overseas transfer allowance someone has is £1,073,100 and where a relevant transfer exceeds the available overseas transfer allowance there is a charge of 25 per cent on the excess.
This created a situation known as double bubble.
Basically, the overseas pension scheme benefits did not take account of any benefits in the UK and vice versa.
This meant that someone could double their tax privileged limits by transferring overseas. Someone could get up to 25 per cent of £1,073,100 from a UK scheme and a QROPS from funds that had received UK tax relief.
In her Budget, Reeves amended that exclusion so that it now only applies to transfers requested before October 30 2024 and completed before April 30 2025 – the stated intent being to prevent certain people being able to receive double tax-free allowances.
This now means that, where a UK resident transfers to a QROPS and remains in the UK, there is a 25 per cent tax charge that closes the loophole.
Unspent pensions brought into the IHT regime
Reeves announced that unspent pensions would be brought into the IHT regime from April 2027 to make the tax system fairer.
The reason was that pensions had become overgenerous as a vehicle for passing on wealth since pensions freedoms was introduced in 2015. Prior to pensions freedoms a lot of pensions death benefits were paid as lump sums with specific pension tax charges of 55 per cent.
The pensions freedom changes in 2015 were not IHT changes. It was a change to who could inherit a pension, making it possible, for the first time, for someone who was not a dependent to take over your pension.
To reverse this change, the government has chosen to change the IHT rules on pensions by bringing all pensions into the estate, rather than reverse the death change in the pension freedoms. Arguably, this is the more complex option.
There is a consultation running until January 22 2025 on this change but it is clear that the consultation is on how the new rules will work in practice rather than to the underlying policy.
For IHT purposes your estate is based on what you are beneficially entitled to at the point of your death and anything where you have a general power of disposal.
Currently, some pension death benefits are paid to whomever the deceased member has nominated, which is called a power of disposal. Other pensions are payable to the estate.
