In this Article will aim to go over some of the fundamental elements of QNUPs and some relevant questions. How to use it and how you can transfer your assets in to one. As well as going over the differences between a QNUPs and QROPs.
Introduction
A QNUPS is an overseas pension scheme in which cash and assets that are not eligible for UK tax relief can be contributed. QNUPs regulations were introduced by Her Majesty’s Revenue and Customs in 2010.
Getting it right many believe that QNUPs are a product or pension scheme. Its the name of the regulations that must be met in order for an overseas pension scheme to be exempt from UK inheritance tax (IHT). Overseas pension schemes that meet the definition of a QNUPS within the QNUPS Regulations – the Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI 2010/0051] – will not be subject to UK IHT unless there is evidence of deliberate tax avoidance.
So one of the most popular questions I get asked is: can I take one and what are the regulations?
It must ultimately meet two main criteria although with this comes more technicality, so please feel free to reach out if you are unsure.
It must be an overseas occupational pension scheme set up by an international organization that meets the definition of International Organization in the UK International Organizations Act 1968 Section
- This is an organisation of which the United Kingdom or UK Government are members; or
- Meet the regulations to be an OPS. In order for a scheme to meet the OPS regulations.
Can I benefit from QNUPs?
The criteria to benefit from QNUPs are pretty simple unlike similar schemes such as QROPs where you have to meet obligations of living outside the U.K and as of 2017 only applies in certain E.U areas. QNUPs can be open to both U.K and Non-U.K residences.
How do I benefit from QNUPs
The main reason why most people review QNUPs is to reduce inheritance tax due to the fact they are not subject to the Lifetime Allowance that is implied by the U.K.
Another popular, option is for expats that live in different places as this can give them the ability to contribute to QNUPs in the different locations that they reside.
Furthermore any funds from the QNUPs that after death will not be subject to inheritance tax ether if still living in the U.K or not.
Can I transfer my U.K pension into a QNUPs?
A U.K pension must be transferred into QROPS or an International SIPP or SIPP. This means that a stand-alone QNUPs can’t receive a U.K pension transfer.
If I transfer to QNUPs when I can I take my benefits?
This depends on the jurisdiction it is based. Malta 50 and the IOM and Guersey 55.
How much can I take out of my QNUPs?
It depends on where it is located normally, the same with QROPs and SIPPs you have 25-30% PCLS that you can take at the age of 55.
What is the difference between QROPs and QNUPs?
Both are tax efficient pension schemes but differ in many ways
Expats that benefit from QROPs would not be U.K resident or looking to return to the U.K. furthermore as stated earlier QROPs is only subject (in 2020) to certain areas mainly Europe while QNUPs it can benefit most U.K residents no matter where domiciled.
What is a major difference is the asset transfers in Qrops have to be liquidated while in QNUPs not all assets have to be liquidated.
Furthermore, the reporting element as QROPs is the HMRC scheme you have to report to HMRC on a yearly basis this does not need to be done with QNUPs.
And from an inheritance tax perspective QNUPs is not subject to tax that is subject on the beneficiaries or that is classified as an estate.
As QROPs and QNUPs are subject to the same rules for tax on income on location please read more on my article on QROPs guide on location and tax rates.
Do QNUPs Have Age Limits?
You don’t have age limits to what you can contribute but can take the be taken from 55 deferred till you are 75 depending on the location.
Untrue Facts on QNUPs
The are sold as exempt from transfer rights in a divorce that is untrue.
You have no tax relief on the amount invested.
Below I will state how a QNUPs must be set up from the HMRC perspective to ensure that is is tax efficient. This will outlay some generic life cases. Although, QNUPs is an inheritance tax vehicle HMRC will look through what they can to see if all is compliant. Here is what a well-known U.K financial company states how to structure.
The scheme must be open to residents in the country or territory in which the scheme is established and either:
– be regulated as a pension scheme in the country it is established, or
– if no such regulated body exists the following conditions need to be met:
(a) the scheme is established in another Member State of the European Union, Norway, Iceland or Liechtenstein; or
(b) the scheme rules provide that at least 70% of a member’s relevant scheme funds must be used to provide the individual member with an income for life and pension benefits cannot be payable earlier than the normal minimum pension age (currently 55) (unless in ill health).
– In addition, the scheme must also be recognised for tax purposes under the country or territory which it is established. The country or territory where the scheme is established must have a system of taxation for personal income under which tax relief is available in respect of pensions and either:
(a) tax relief (which includes exemption from tax) is not available to the member on contributions made to the scheme by the member, or their employer in respect of earnings to which benefits under a scheme relate; or
(b) the scheme is liable to taxation on its income and gains and is an Australian superannuation scheme complying with Australian income tax law; or
(c) all or most of the benefits paid by the scheme to members who are not seriously ill are subject to taxation.
How are QNUPS structured?
The local jurisdiction will set out how local pension schemes are structured, however many schemes follow a similar structure:
There is a master trust set up which appoints a corporate trustee (the QNUPS provider) and their powers, roles, and responsibilities in terms of administering the QNUPS.
The trustee must be based outside the UK for the scheme to be considered as aQNUPS.
There are usually wide investment powers allowing flexibility for the trustee to invest in a wide range of assets – for example, cash, bond, property, hedge, equity, and commodity funds.
The trustee of the QNUPS holds these investments on the member’s behalf and has investment powers.
They will often appoint an Investment Manager to switch investments on their behalf as market conditions change.
The trustee would also be responsible for making payments of benefits from the QNUPS to the member.
Are there any HM Revenue and Customs (HMRC) reporting requirements placed on the QNUPS provider?
No. QNUPS providers have no obligation to submit information to HMRC. However, these providers may have to meet local tax reporting requirements depending on the local jurisdictional rules.
Whilst the member is a non-UK tax resident, can the QNUPS receive funding from the individual or employer?
Yes, subject to the rules of the QNUPS provider and any regulation in the jurisdiction in which they reside. These contributions are unlikely to qualify for any form of tax-relief.
Why does a QNUPS qualify for IHT exemption?
QNUPS used to qualify for UK IHT exemption before A-day (6 April 2006). The pension simplification legislation contained within the Finance Act 2004 and subsequent statutory instrument The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 (SI2006/206), removed the UK IHT exemption due to the way the legislation had been drafted. The Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI 2010/0051] simply restored that UK IHT exemption for these schemes and defined the schemes collectively as QNUPS.
Will a QNUPS always be IHT exempt?
Clearly, HMRC would challenge abuse and therefore it is essential that an arrangement that meets the QNUPS definition be regarded as a pension arrangement.
There are no specific limits detailed in legislation, however contribution levels may be prescribed in local pension law for the jurisdiction in which the QNUPS is established, and if broadly similar to UK pension rules, are likely to be considered reasonable. Another factor that HMRC are likely to consider when assessing transactions on the scheme for tax avoidance is whether the payment of the contributions to the QNUPS affected the individual’s standard of living.
What Are The Examples That HMRC Are Likely to Consider Reasonable?
Although this is ultimately for HMRC to determine, the following examples provide some guidance on what may be deemed acceptable as contributions to a QNUPS. These are purely provided for guidance and ultimately any values may be challenged by HMRC; especially where the sole purpose of the contribution is to avoid an IHT liability.
Scenario 1
Mrs. Adams is aged 55, she is a non-UK resident. She has wealth of over $1 million and would like to make a lump-sum contribution of $150,000 into her existing QNUPS. The QNUPS currently has a value of $250,000. The contribution will come from the proceeds of the sale of a rental property. This does not affect her standard of living.
Scenario 2
Mr. Collins is aged 57, he is a UK resident. His estate is worth £1 million. He recently inherited a sum of £200,000 from the estate of his deceased father. He wants to make a payment of his £200,000 inheritance into his existing QNUPS, currently worth £300,000. This does not affect his standard of living.
Scenario 3
Mr Jones is aged 48, he is non-UK resident. He is employed overseas but there are no pensions provided in the country where he resides. His employer is happy to contribute to a pension scheme for him and suggests monthly contributions into a Guernsey QNUPS representing 15% of his salary each year. This does not affect Mr Jones’s standard of living.
What Are The Examples That HMRC Are Not Likely To Consider Reasonable?
All the following examples already have existing QNUPS arrangements in place. We will assume these all have a current value of $250,000
Scenario 1
Mrs. Harvey is aged 70 and has been retired for 20 years. She has UK assets worth a total of £5 million. She has been told if she transfers money into her QNUPS, it will immediately be outside of her estate for IHT purposes. She wants to transfer £1 million into her QNUPS and she wishes to take benefits straight away.
Scenario 2
Mrs. Jack has been diagnosed with terminal cancer and has been told she has 6 weeks to live. She receives an income of £100,000. She rents property but holds investments valued at £500,000. She wants to transfer a large portion of this into a QNUPS.
What if The Member of The QNUPS Returns to The UK or is a UK resident?
If the member is UK resident or returns to the UK, it would be possible for the member to make additional contributions (assuming the scheme rules of the QNUPS allowed this). The contributions made in the UK would not however qualify for UK tax relief.
If the underlying investment of a QNUPS is a highly personalised portfolio bond, would deemed gains apply?
The member is likely to be regarded as the person who “created” the settlement under section 465 ITTOIA 2005 as they are providing ongoing contributions to the QNUPS.
However, section 366 ITTOIA 2005 will prevent a double tax charge arising where there is also a tax charge to section 575 ITEPA 2003. This will only apply where foreign pension income is being taken and therefore this will not prevent a “deemed gain” arising.
Members should utilise an offshore bond that is not a highly personalised portfolio bond if they are UK resident or request the insurer to endorse their Bond if they are returning to the UK. See our article: Personal Portfolio Bond taxation for further details.
Will the value of the pension fund paid to beneficiaries on the member’s death be included in the member’s estate for UK IHT?
No. The UK pension rules governing QNUPS allow for the benefits payable under such schemes to be exempt from UK IHT.
No Member Payment Charge will apply as the funds are not UK tax relieved funds.
When could a QNUPS provider change other than when the member requests a transfer to another QNUPS provider?
A QNUPS provider will only change where the corporate trustee has ceased trading. In this situation, a suitable replacement trustee would need to be appointed for the QNUPS in the short term and the scheme member could choose to transfer to another QNUPS provider.
Conclusion
Like most tax-efficient schemes QNUPs can be used as effectively for both Non and U.K residence but the likelihood that HMRC is looking to change the treatment of QNUPs which have seen actively in QROPs in 2017 is likely to be reviewed in the forthcoming years. Additionally, for anyone seeking to undertake a QNUPs should fully understand the logistics. As have stated are presently ill-advised as ways to mitigate divorce settlements or to mitigate Inheritance tax that can not be true in certain circumstances. Therefore would advise anyone to fully seek through options before taking out a QNUPs.
