The recent decision by the First-tier Tribunal in the case of Trevor John Masters v HMRC could be an important one for individuals with large pension pots looking to leave the UK. The case related to pension payments made to a former Tesco executive whilst he was resident in Portugal and whether these were still taxable in the UK due to the UK-Portugal Double Tax Convention.

The taxpayer, Mr Masters, had transferred his defined benefit (DB) pension from the Tesco pension scheme into a self-invested personal pension (SIPP) in 2016. Recent reports have indicated that transfers from DB schemes were more popular at this time and that demand for such advice has fallen sharply since then.

Having undertaken this DB transfer, Mr Masters later moved overseas to Portugal and was registered for its Non-Habitual Resident (NHR) regime in 2019 and 2020. The NHR regime allowed individuals to benefit from certain tax exemptions in Portugal for a 10-year period, including for non-Portuguese pension income to be exempt from tax (later changed to a 10% tax rate for those acquiring NHR status from 1 April 2020).

In the 2019/20 tax year, amounts totalling more than £3.5m were withdrawn from the SIPP and were subject to UK tax withheld at source of around £1.5m. The case broadly centred on whether a taxpayer is entitled to a repayment of such UK tax in these circumstances.

In particular, one of the key areas of focus was whether the pension payments were “paid in consideration of past employment”. If they were, then under the tax treaty between the UK and Portugal, the pension received would only be taxable in Portugal, and not in the UK. HMRC sought to contend that by undertaking the DB transfer to a SIPP, which does not require employment as a condition to exist, the pension had lost enough of its connection to the original employment and could therefore be taxed in the UK.

If that was the case, it could have far-reaching consequences for many expats who had moved overseas and similarly undertaken a transfer of their old workplace pension, as many of the UK’s double tax treaties with other countries have similar wording. These principles also apply to transfers from defined contribution occupational pensions to SIPPs, which often occur as individuals consolidate their pension pots.

The tribunal ultimately disagreed with HMRC’s stance. It found that in the taxpayer’s circumstances, the pension funds largely originated from their previous employment and that the transfer to the SIPP did not break the causal link to that employment. No further contributions were made to the SIPP following the end of the taxpayer’s employment and the Tribunal therefore came to the conclusion that the pension was “paid in consideration of past employment”. As a result, the pension payments were only taxable in Portugal under the tax treaty and the UK tax withheld at source should be repaid.

In practice, we have seen HMRC simply accept some applications for relief under double tax treaties where funds have been transferred from an occupational pension to a SIPP. In other cases, HMRC has not accepted that the SIPP funds are paid in consideration of past employment. Thus, this judgment provides welcome clarification of the principles.

The judgment also considered whether the pension payment was still theoretically “subject to tax” in Portugal, even if it was exempt, as that may have provided the taxpayer with another argument that UK tax was not due. It was concluded that the taxpayer would not have been able to rely on this argument, but it was ultimately not relevant in this case.

The decision in this case will come as a relief to many taxpayers who have retired overseas and drawn their pension or have plans to. Whilst the news may initially appear positive, taxpayers shouldn’t assume that their own pension will be free from UK income tax if drawn whilst they are non-resident. In many cases, the pension will still require a strong link to a past employment. As this case confirms, if someone receives a salary and then contributes this to a personal pension, rather than an occupational one, then that is unlikely to be a strong enough link to employment.

The tax treatment of UK pensions received by residents of other jurisdictions remains highly complicated. Each individual’s situation will need to be reviewed on a case-by-case basis and the position may not always be clear. In particular, there could be considerable uncertainty when the pension has been transferred and its value also relates to substantial investment growth or non-employment related contributions.

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