On the 15th of February this year, HM Revenue and Customs introduced new legislation to retrospective solve an issue that had meant that UK pension transfers to QROPS (Qualifying Recognised Overseas Pension Schemes) were not fully IHT protected.
The HM Revenue and Custom’s revisions have received significant interest from financial advisers, financial services providers – particularly those with QROPS – and expatriates as well as high net worth individuals onshore in the UK who may be able to benefit from QNUPS now that a higher rate taxpayer’s tax relief on pensions is being capped.
However, it is critical to note that broad and favourable interpretation of these less than perhaps wholly complete and as yet watertight regulations is widespread, and that as a result, a certain dissemination of misleading information is ongoing, alleging for example that there is more widespread inheritance tax relief possible with QNUPS than there perhaps is. To stem the flow of misleading information we have decided to produce the Shelter Offshore independent guide to QNUPS to ensure a more considered review is applied to QNUPS by any potentially interested party.
The information contained in this guide does not constitute financial advice.
Who is This Guide For?
If you are looking for a loose, wholly favourable and therefore potentially inaccurate and dangerous interpretation of QNUPS, you won’t find it in this guide. This guide is to explain the legislation that introduced QNUPS, explain the widely held industry understanding of the legislation, and introduce you to the potential benefits of Qualifying Non-UK Pension Schemes.
As we will endeavour to explain, QROPS will by definition be QNUPS, however QNUPS need not be QROPS – therefore this guide will be of use and interest to you if you’re already living abroad with a significant pension pot sat idly by in the UK, you’re considering moving abroad within the next twelve months, you’re planning to live and work abroad and save towards retirement, or you’re certain you want to retire overseas one day or live abroad for at least five years.
Additionally, if you already have a QROPS or are considering transferring to a QROPS or you’re a higher rate taxpayer in the UK, QNUPS legislation will potentially be of valuable interest to you as well.
What Are QNUPS All About?
The legislation that came into force and which created QNUPS was written to correct what was basically an error in the Finance Act 2004; and without this amendment, UK pension funds transferred to Qualifying Recognised Overseas Pension Schemes (QROPS) were technically liable to UK inheritance tax charges upon the death of the QROPS account holder. These new regulations now mean that a non-UK resident may transfer their UK pension rights to a QROPS and upon their death, whether that happens before or after the age of 75, no UK IHT liability arises.
However, favourable interpretation of the legislation means that some financial advisers and their companies are stating categorically that QNUPS not only allow the scheme holder’s beneficiaries to escape British inheritance tax, but that QNUPS also allow for the legal avoidance of local laws relating to succession and death duty in the jurisdiction in which the account holder was tax resident when they died.
This is potentially inaccurate interpretation, because you can be certain that HMRC did not introduce the new regulations to allow individuals to place all assets from their estate into a QNUPS to shelter them from IHT at home and abroad!
Without wishing to enter into the argument surrounding interpretation that is ongoing until the point at which HMRC produces comprehensive clarification, it is suffice to say that QNUPS are a positive development in expatriate and international pension planning.
In the meantime, to further define QNUPS, it’s worth noting that for a non-UK pension scheme to become qualifying it must satisfy the same conditions necessary for a recognised overseas pension scheme. I.e.,
• It must be set up outside the UK
• It needs to be regulated as a pensions scheme in the country in which it is established
• And it should be recognised for tax purposes in the country in which it is established
There is however an important exception to QNUPS always following QROPS’s rules and that is that there is no requirement for there to be Double Taxation Agreement in place between the overseas scheme’s jurisdiction and the UK if the scheme is established outside the European Economic Area. The double taxation agreement is not required because as the legislation currently stands, there is no ongoing reporting requirement from QNUPS providers to HM Revenue and Customs for the first five years following a transfer from a UK based pension scheme. Naturally enough, this removal of reporting restrictions is just one benefit of QNUPS.
What Are QNUPS Benefits?
The full list of potential benefits that QNUPS can offer is still under review by all those in the financial services industry as we wait for further HMRC clarification. However, the point of introducing the legislation that created QNUPS was to free up UK pensions transferred abroad from potential IHT charges back home. Other benefits may potentially include the following non-exhaustive list, depending on your own individual circumstances and final HMRC clarification of QNUPS rules: -
• There is no age restriction on investing into QNUPS – therefore you can conceivably continue to invest post your retirement date
• You do not need to receive an income directly from employment to allow you to make a contribution
• There is seemingly no maximum limit on how much you can invest into QNUPS, which is why they may appeal to higher rate taxpayers affected by the erosion of tax relief on UK pensions
• QNUPS can be structured tax efficiently for some people and potentially positioned in such a way that one avoids local wealth and death taxes
• QNUPS potentially avoid local laws on inheritance tax and succession, meaning you may be able to have complete choice over who inherits your assets
• You can hold both a QNUPS and a QROPS - but no reporting responsibilities exist unless the QNUPS scheme holds assets from both
• Fund managers of QNUPS theoretically have even greater investment freedom that those of QROPS, with residential property and even perhaps more personal investments such as fine wine, fine art, antiques and yachts being discussed as potential investment assets by some
• QNUPS are being dubbed exceptionally tax efficient ‘wrappers’ by many in the financial services industry
Note, clarification of the exact benefits you could enjoy would need to be supplied by a financial adviser assessing your personal financial position in light of whether you could benefit from starting a QNUPS or transferring your UK pension or your QROPS into a QNUPS. If you wish to speak to a qualified professional about your personal position, we can put you in touch with a financial adviser if you complete our offshore advice form.
