UK-UAE tax treaty lets UK pension holders cash out tax-free

Expats and Gulf nationals with UK pensions can access their entire pot tax-free under a new double-tax treaty coming into force on Thursday. But experts warn the new rules could backfire.

New rules in the UK governing pension withdrawals are design to prevent the funds from being double-taxed. Jason Alden / Bloomberg
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Expats and Arabian Gulf nationals with UK pensions are now free to access their entire pot tax free under the terms of a new double tax treaty.

The double tax agreement (DTA) between the United Kingdom and UAE comes into force for personal tax matters this week and 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 may now be free to withdraw their full UK pension tax-free in some circumstances. The DTA is designed to build closer trade relations, ease labour movement and prevent businesses and individuals from paying tax twice on the same money.

Mr Denton, an international specialist based in the UK, said this could have benefits for British expats and other nationalities with UK pensions. “This includes GCC nationals who have saved in a UK pension scheme,” he said during a visit to Old Mutual’s Dubai office this week.

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.

“The rules could be the best thing since sliced bread, or your worst nightmare, so be careful,” said Geraint Davies, the managing director at Montfort International, a UK FCA-regulated adviser in international pension transfers and taxation.

Mr Denton said that from tomorrow UAE residents should not have to pay any UK tax on “pensions and other similar remuneration”, provided they meet UK non-residency rules.

Under UK “pension freedom” rules introduced in April 2015, savers of 55 and older can cash in their pension funds.

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.

Mr Denton said you typically have to be resident abroad for at least five full tax years to qualify. “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.”

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.

However, wealthier savers who may have a UK inheritance tax (IHT) liability when they die should think carefully before taking money from their pension, Mr Denton warned. “Pension funds are generally not subject to IHT on death but any withdrawals you do not spend will form part of your estate for IHT purposes.”

Stuart Ritchie, a UK-regulated pension transfer specialist for AES International in Dubai, said the new agreement is easing pension withdrawals, while HM Revenue and Customs (HMRC) is simultaneously clamping down on transfers into qualifying recognised overseas pension schemes (Qrops).

HMRC recently announced a new 25 per cent tax charge 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.”

He also warned that it can be dangerous to empty your pension scheme in one go, unless you have other retirement funds, as you may be tempted to spend the money and leave nothing for your final years. “Wealthy expats should look to draw other forms of retirement income first, to reduce their IHT liability,” he said.

Mr Davies added that the new DTA could give unscrupulous UAE-based advisers a fresh opportunity to lure people into transferring their pension funds into overpriced offshore bonds.

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