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Sun 2 Apr 2017 12:21 PM

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UK-UAE treaty means UK pension free of income tax

Denton warns people of the long-term implications of stripping down their pension

UK-UAE treaty means UK pension free of income tax
(Image: Flickr/Images Money)

A new double tax treaty (DTA) between the UK and the UAE, which becomes effective April 6, will allow UAE residents to access their UK pension free of UK income tax, according to an expert.

David Denton, Head of International Technical Sales at Old Mutual Wealth, said the agreement represents a significant milestone in the relationship between both countries and offers interesting tax benefits to anyone who holds a UK pension.

This could be British and other nationalities for expats who have a UK pension, but could equally apply to GCC investors who have saved into a UK pension scheme, he said.

Denton, however warned that the new ruling may encourage people to strip out their pension savings, something which could have other implications.

“For UK expats, stripping money out of a pension tax free needs to be balanced against future inheritance tax exposure and the need to ensure funds last throughout retirement – anyone considering accessing their cash under this new treaty should seek professional advice.”

The new DTA was negotiated and signed in 2016, and came into force on 25 December, 2016. The UK has approximately 140 DTAs and the UAE has over half that number.

Determining tax residency for the UK revolves around the Statutory Residence Test 2013, whilst an individual is deemed resident in the UAE if they are domiciled there. For those that meet this definition of UK non-resident and UAE resident, and are interested in the impact upon their UK pensions, Article 17 specifies that “pensions and other similar remuneration paid to a resident of a contracting state shall be taxable only in that state”.

“This appears to have the surprising effect that, subject to the normal 55 age requirement, those in a UK scheme offering flexi access drawdown courtesy of the ‘freedom and choice’ legislation in 2015, could access their pension fully and without tax.

“However, people need to take care to ensure they are not caught by the UK temporary non-residency rules,” Denton said.