What does section 395B of the Income Tax (Earnings and Pensions) Act 2003 provide?

Section 395B provides a full or partial exemption from United Kingdom income tax on lump sums paid from overseas employer-financed retirement benefits schemes. The exemption applies where the employee's reckonable service includes foreign service and the recipient is not UK resident in the tax year the lump sum is received.

When does a full exemption from UK tax apply under section 395B?

Full exemption applies if at least 75% of reckonable service is foreign service, or if the last 10 years of service exceeding 10 years are entirely foreign, or if at least half of service exceeding 20 years is foreign including any 10 of the last 20 years. Meeting any one condition is sufficient.

How is the partial reduction calculated under section 395B when full exemption does not apply?

Where no full exemption condition is met, the taxable amount is reduced proportionately. The reduction equals the ratio of the foreign service period to total reckonable service. For example, with 10 years of foreign service out of 16 total years, only 6/16 of the relevant part of the lump sum is subject to UK income tax.

Who qualifies as a related person for the purposes of section 395B?

A related person includes the employee's spouse, civil partner, widow, widower, or surviving civil partner. It also includes financial dependants, those in mutual financial dependence with the employee, dependants due to physical or mental impairment, and the employee's personal representatives. Dependence is assessed at the time of death if applicable.

Income Tax (Earnings and Pensions) Act 2003 section 395B

Exemption or reduction for foreign service

Section 395B provides a full or partial exemption from UK income tax on lump sums paid from employer-financed retirement benefits schemes established overseas, where the employee's service includes periods of foreign service and the recipient is not UK resident.

Applies to lump sums from overseas employer-financed retirement benefits schemes received by a non-UK-resident employee, former employee, or related person, where the service includes foreign service
Full exemption is available where foreign service makes up at least 75% of reckonable service, or where the last 10 years (if service exceeds 10 years) are entirely foreign, or where at least half of service exceeding 20 years (including any 10 of the last 20) is foreign
Where full exemption does not apply, a partial reduction is given in proportion to the amount of foreign service relative to total reckonable service
Related persons who may receive the lump sum include spouses, civil partners, surviving partners, financial dependants, dependants due to impairment, and personal representatives

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