On the 15th February 2010, a new HMRC statutory instrument came into force which creates significant opportunities for UK resident domiciles and British expatriates who remain UK domiciled to save UK inheritance tax (IHT) as well as local taxes in the country in which they are tax resident.
The UK legislation created a new type of trust known as Qualifying Non-UK Pension Schemes (QNUPS) – which should not be confused with Qualifying Recognised Overseas Pension Schemes (QROPS). However, similarly to QROPS, the aim of setting up a QNUPS remains that of providing an income for life.
The tax rules for pension schemes are generally more favourable than other investment structures.
Subject to the jurisdiction of the QNUPS, it allows retired people to continue to put money into a pension scheme –
- There is no maximum age at which someone can settle money in a QNUPS.
- Secondly, there is no requirement for earned income from an employment in order to make a contribution.
- Thirdly, there is no maximum contribution that can be made into a QNUPS.The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.Withdrawing benefits A QNUPS is a pension scheme trust and as such there is an entitlement to take a cash lump sum and income during lifetime, with the remainder of the fund being able to be passed to spouse or heirs on death free from tax. In certain respects, QNUPS have many similarities to UK Pension Fund Withdrawal or Income Drawdown contracts in the manner in which benefits can be taken by the member, but without the tax penalties on death or being forced to purchase an annuity.
The following advantages are available to you through a QNUPS:
- As a pension scheme, a QNUPS is very tax efficient in most countries.
- A lump sum can be taken of up to 25% of the fund value.
- Income can be taken from age 55 or it can be deferred as it does not need to be taken until age 75 (at which point in time, it must be taken). In certain countries it can be paid in a manner where a significant portion can be paid tax free.
- When income is taken it is drawn down from the fund (within UK Government Actuarial Department (GAD) limits), the scheme assets remain invested. Otherwise the assets grow free from tax.
- On death the value of the QNUPS will be exempt from UK inheritance tax irrespective of the size of the fund.A QNUPS offers considerable investment flexibility and choice. Furthermore assets can be invested and any benefits taken in a currency of the clients choice, giving the opportunity to reduce currency risk.
The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme.
QNUPS and UK inheritance tax
A QNUPS will escape UK inheritance tax even if someone is a UK domicile. It is not a PET so there is no requirement to wait seven years to avoid IHT.However, where an individual fails to exercise his/her rights to take a pension, then on death, the tax man can claim UK IHT from the estate on the basis that the failure to exercise that right was a gratuitous transfer of value. That said, HMRC have stated that they would not pursue a claim where the death benefit is paid to the plan holder’s spouse or dependents or where the plan holder has survived for more than 2 years after setting up the pension.
Your investment decisions should be based on your specific circumstances and objectives. For expert advice on how QNUPS can help you in your individual circumstances seek a consultation with a tax and wealth management firm such as Blevins Franks.
The tax treatment(s) detailed above is current at the time of writing; this is based on our understanding of current UK and overseas legislation and taxation practice, and may change in the future.