When over 300 Guernsey QROPS were removed from HMRC’s approved list on 12 April 2012, there was shock and dismay among the island’s financial community and panic among their investors.
Since QROPS became possible in 2006, Guernsey has enjoyed a large share of the market. Investors were attracted to the Channel Islands because it is a mature investment community with a favourable attitude to tax, and already hosts many leading financial institutions.
Business in Guernsey is often transacted in English, which is a big advantage for UK expats.
So why were the schemes removed from HMRC’s whitelist? HMRC did not like the fact that residents and non-residents of Guernsey were treated differently in their pension taxation system. As a non-resident with a Guernsey QROPS, it was possible to achieve a virtually tax free pension income, which was not possible for Guernsey residents. HMRC saw the arrangement as a tax avoidance scheme.
To be fair, it is incredibly difficult to become a permanent resident in Guernsey, unless you are given consent to purchase a residential property where prices are very high indeed. So there were probably many non-resident Guernsey QROPS investors who would have loved to be Guernsey residents, if they could only have been allowed to settle there!
Guernsey had been aware of the potential change before April 2012. The leading finance houses opened new schemes (known as 157E schemes) which offered the same tax treatment to residence and non-residents, but there was a slight different in the availability of pension contribution relief.
The UK government was not satisfied with these schemes, taking a dim view of the Guernsey legislation including section 157E and calling it a “loophole”. So the Guernsey community have been left to pick up the pieces, as they decide how to fight back and change their schemes to be compliant.
Spokesmen for the islands have said that they feel “singled out” as in terms of aggressive tax planning they claim to be no worse than other offshore destinations.
HMRC’s decision left the pensions of some state employees off the list, which is particularly embarrassing for the community.
What happens next? Many of the Guernsey QROPS investors have transferred their pensions to newer QROPS destinations like Malta, which has undergone extensive talks with HMRC before it recently became a popular QROPS host.
It will be difficult for Guernsey to regain the momentum it had before April. However, one thing is for sure, as long as people are fighting over their business, the QROPS investors must be the ones who win.