HMRC R43 Form v DTI Form for UK Pensions Paid Overseas

When you live outside the UK, but you have a UK pension scheme ready to pay out, you need to be aware of some of the basics for cross border pension payments as well as tax treaties and the forms.

UK Tax Treaties with Other Countries

The UK has double taxation treaties with many countries.  This means you will not usually pay double taxes on income or gains both in the UK and where you are tax resident.  These tax treaties usually follow a common theme such as:

• Immovable property income and gains will usually be taxed where the property is situated.
• Pension income from state sources or social security contributions such as State pension, Civil Service pension and Armed Forces pensions will usually be taxable where they are derived from e.g., a UK State Pension will usually be taxable in the UK and not where you are tax resident.
• Periodic pension income payments from workplace pension sources and private pensions will usually be taxed where you are tax resident and not where the scheme income was derived from.
• Ad hoc pension lump sums will usually be taxable where the pension scheme lump sump was derived from and not where you are tax resident.

There are of course many slight differences to each tax treaty, for example France taxes you on all even if your pension lump sum would have been tax free in the UK.  The US treaty reads that UK pension lump sums that are tax free in the UK (if paid alongside a periodic payment, will be free of Federal taxes but may be subject to local state taxes (but again this may differ if you are a UK national or US national or dual national).  In the Netherlands, Article 17 Pensions part 3 states “Notwithstanding the provisions of paragraphs (1) and (2) of this Article, if a lump-sum payment is paid before the date on which the pension commences, it may be taxed in the Contracting State from which it is derived.  However, if the lump sum is paid on or around the commencement of a periodic pension, it shall be taxable only in that State.” And if you talk to a *Dutch adviser, they may say the ad hoc ‘taxable’ elements of flexible drawdown will fall under this and pay no tax in the Netherlands, but HMRC disagrees and says tax should be paid their and any taxes withheld in the UK should be refunded.

HMRC R43 Form

All British Nationals and EU Citizens are entitled to a full UK personal income tax free allowance (currently £12,570 pa).  If you are tax resident in the UK, you automatically get this.  If you a tax resident overseas, you must apply each year to claim a full UK personal allowance.  Therefore, if you have UK property rental income profits of below £12,570 pa, then there should be no UK taxes.  If you have taxable pension income in the UK but you live in a country with no double tax treaty with UK, you can still complete an R43, claim the UK personal allowance and have the first £12,570 pa of any UK pension income tax free.

*Taking the above Dutch adviser argument, we have seen argued that where flexible drawdown ad hoc lump sums are taken, then the tax treaty says lumps taxable in the country where pension derived from (Not the Netherlands) and if you complete an R43, secure a full UK personal allowance, then you can have up to £12,570 of pension income tax free.  As you know, both HMRC and we disagree with this.

We agree with HMRC that the double tax treaty should apply and therefore HMRC’s Double Tax Treaty for Individuals form (DTI form) should be ‘stamped/signed’ by your local tax authority.

HMRC Double Tax for Individuals (DTI) Form

If you live in a country that has a double tax treaty with the UK and you have workplace or private pension income (and flexible drawdown) that would be taxable in the UK and have taxes withheld at source.  You can complete a DTI form which is then rubber stamped or signed by your resident country’s tax authorities and returned to HMRC.  This confirms to HMRC that you are tax resident in the country that you live.  HMRC will then issue an NT tax code (no tax) to your UK pension scheme and any previously withheld taxes will be refunded and any future ‘taxable’ payments will be paid with no UK tax deduction, and you then declare for taxes in the normal way where you live.

The Problem

If you withdraw pension income as regular, periodic payments via an annuity or regular flexible drawdown payments, then this should fall under DTI provisions, no taxes withheld (or refunded) in the UK and you pay tax where you are tax resident.

We believe that most double tax treaties were written and concluded before flexible drawdown was accessible for most UK pensions, so this is not technically addressed in the tax treaty and needs tidying up.  Therefore, this presents a grey area where some overseas tax advisers suggest that if you are taking ad hoc UK lump sum flexible drawdown payments (not regular/periodic payments) then they may fall under the definitions for lump sums payments and if you then apply via an R43 for a UK personal allowance whilst resident overseas, then you can draw ‘taxable’ ad hoc flexible drawdown payments from the UK below your personal allowance meaning they are tax free in the UK but also the double tax treaty says lump sums are taxable where the lump sum is derived from, so the overseas tax authority where you live will not tax you.

HMRC disagrees with this and so do we.  In the spirit of the double tax treaty, if the pension ad hoc payment would have been taxable had you still been living in the UK, then an NT code should be issued, and the lump sum should then be taxable where you are tax resident.

Our guidance:  Only talk to your country’s tax authority to get their interpretation and ruling of where you should pay taxes on UK pension payments.  Do not get caught out with an unexpected tax bill and fine later ‘down the line’.

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