The UK First Tier Tribunal case (Trevor John Masters v HMRC [2025] TC09607) has ruled that a Portuguese resident claiming Non-Habitual Resident (NHR) status and drawing income from a UK self-invested personal pension (SIPP) can claim relief from UK tax under the UK-Portugal Double Tax Treaty.
This is welcome news, especially for expatriates who reside in countries with special expatriate tax regimes, or where there are no personal taxes.
Why This Matters Now
In a world of increased mobility, many people who have accrued UK pension entitlements are choosing to retire outside the UK. Some popular retirement jurisdictions offer attractive tax regimes with low tax rates, or no tax at all, on foreign pension income. Where such a jurisdiction also has a double tax treaty in which the UK gives up its taxing rights over UK pension income, the retiree’s pension income is completely tax free. This case is relevant to those individuals and, whilst the judgement is to be welcomed, the case contained some warning signs that could trap the unwary.
The Facts
- The taxpayer had accrued defined benefits pension entitlements in his employer’s pension scheme.
- In 2016, he transferred the value (just under £6 million) to a SIPP.
- The taxpayer later moved to Portugal and was registered for the NHR regime in 2019 and 2020.
- At this time, the NHR regime allowed individuals to benefit from tax exemption on non-Portuguese pension income for 10 years (later changed to a 10% tax rate for those acquiring NHR status from 1 April 2020).
- In the 2019/20 tax year, the taxpayer withdrew £3.5 million from the SIPP. UK tax of around £1.5m was withheld at source, which the taxpayer reclaimed under Art.17 of the UK-Portugal double tax treaty.
- HMRC denied his claim, and the taxpayer appealed to the First Tier Tribunal.
The key argument presented by HMRC was that the pension payments were not “paid in consideration of past employment”, which is a requirement of Art.17 of the treaty to ensure that the pension would only be taxable in Portugal, and not in the UK.
HMRC argued that, by transferring the pension to a SIPP, it had lost its “relevant causal connection” to the original employment and could therefore be taxed in the UK.
The tribunal disagreed with HMRC’s stance and ruled in favour of the taxpayer.
In reaching their conclusion, the Judges took some important factors into account, such as:
- A clear link between the original pension fund and previous employment, including the fact that contributions had been made by the employer, and by the employee via salary sacrifice.
- No further contributions were made to the SIPP following the end of the taxpayer’s employment.
- The period between transfer and drawing the pension was only 4 years.
Implications for Expatriate Pension Planning
If the judgement had gone in favour of HMRC, there could have been serious consequences for many expatriates who had transferred their occupational pension to a SIPP, especially those living in countries with similarly worded double tax treaties.
However, while this is positive news, it should not be assumed that all UK pensions will benefit from treaty relief, as there must be a strong link to a past employment.
An opinion expressed by the Judges suggests that the position could have been different if the member had received their salary and then made contributions instead of using salary sacrifice. There is a subtle difference between these two funding methods, and this case highlights a potential trap for the unwary.
Particular care should be taken where the individual resides in a country with similar tax advantages to the former Portuguese NHR regime, or where there are no personal taxes.