British expats with QROPS pensions need to keep an eye on exchange rates to make sure they are not unexpectedly netted by a new Spanish tax rule requiring the reporting of investments.
Modelo 720 rules require any foreign assets worth more than 50,000 euros should be declared to the Spanish tax authority.
That financial limit keeps changing as the Pound drops in value.
Under the rules, expats have to declare any pensions that:
- Break the 50,000 euro limit
- Allow full encashment
- Started on or after January 1, 2016
This would cover any UK pension to which British flexible access rules apply and any Qualifying Recognised Overseas Pension Scheme (QROPS) that offers flexible access as well.
QROPS netted by tax rules
So far, that only covers some Malta QROPS.
At least one Malta QROPS already offer pension freedoms and others are ready to follow suit.
No QROPS outside the European Union are affected because of the 70/30 rule which specifically bars providers from offering pension freedoms to customers.
If pension freedoms are extended to other EU countries and the fund is more than the 50,000 euro limit, then they would have to be reported as well.
At current exchange rates, the reporting limit is the equivalent of £45,060 – close to the average UK pension pot size of around £38,000.
Although the Spanish tax authority wants QROPS and pension reporting on the modelo 720, no tax is charged on pension funds – abut tax may be due on any income generated by the investment.
More QROPS transfer rules
Around 1.1 million British expats live in Spain and many hold cash in UK pensions or QROPS.
British expats in Spain who hold a Malta QROPS are advised to check with their provider or financial adviser to see whether the scheme allows flexible access.
Modelo 720 is an example of how local tax rules can trap British expats who fail to keep up with pension changes at home and abroad.
For example, the Australian government recently capped pension fund sizes and placed limits on transfers into Ausralia QROPS based from the UK.
For many years, the US Internal Revenue Service (IRS) has not recognised QROPS as official pensions either.