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I was asked to submit an article to this newsletter on the subject of QNUPS. So, what could I possibly write?
Well, it’s almost five years since I wrote an article called ‘Should we go nuts for QNUPS?’ As such, like anyone who has been around the block once or twice, I thought I would use that article as ‘inspiration’.
Of course, half a decade is a long time in the tax world. It is enough time for new rules to come and go, old received wisdoms to be turned on their heads and relics from the past to be brought back to life (the draughtsman is as fond as recycling as I am).
However, QNUPS has seemingly chugged away in the background.
From my own perspective, I have advised both prospective members of such pension schemes and have also been involved in the creation of a number of the pension schemes themselves.
First things first, a Qualifying Non-UK Pension Scheme (QNUPS) is not a self-contained product – although a product may be designed such that it qualifies as a QNUPS. This is because it is merely a specific tax status.
This particular status comes, in the first instance, from Inheritance Tax (“IHT”) code. That said, the provision acts as little more than a signpost to key statutory instruments. It is this secondary legislation that adds meat to the statutory bones.
In short, a QNUPS is a type of international pension scheme. However, it is an international pension scheme that doffs its cap to the UK pension system just enough for HMRC to ‘recognise’ it.
Note, this is not the same as a pension scheme being registered.
However, the scheme and jurisdiction in which it is based must satisfy a number of requirements. Those are outside of the scope of this article.
For the acronym-ically challenged, a QNUPS is not a QROPS!
The detailed differences between these two types of scheme are beyond the scope of this article (again!). But put quite simply, a QROPS, in terms of its structure, will be similar to a QNUPS but those operating the scheme will have agreed to certain reporting obligations with HMRC.
As a result, a QROPS is a vehicle which can potentially receive the contents of a tax relieve UK registered pension pot without a tax charge (subject to the relatively new Overseas Transfer Charge). A QNUPS that does not satisfy the QROPS conditions cannot.
It is worth pausing to mention that, for the purposes of this article, I will reflect on the tax implications of an individual making contributions to a QNUPS and not those made by an employer.
Firstly, there is unlikely to be any income tax relief available on a contribution to the scheme. However, the corollary of this is that the contribution is outside of an individual’s Annual Allowance. This can make a QNUPS a useful ‘top hat’ pension scheme. In other words, where the maximum tax relief has been mopped up for a particular year, additional contributions could be made to a QNUPS without penalty.
Further, in my experience, entrepreneurial clients might consider the loss of (these days much reduced) tax relief on contributions to a registered pension scheme a price worth paying so that they have access to a greater range of investments under a QNUPS.
Assuming that any contribution is in cash, then there should not be any capital gains tax (“CGT”) of Stamp Duty Land Tax (“SDLT”) implications.
On the basis that the contribution is being made to secure genuine retirement benefits, there should not any IHT consequences of the contribution.
One needs to take more care in respect of the tax analysis where one is contemplating the contribution of an asset to the QNUPS.
The QNUPS will have a statutory exemption from CGT in much the same manner as a UK registered pension scheme.
This is particularly handy for investment in UK residential property.
Firstly, as it is not a registered pension scheme, a QNUPs is not subject to the effective prohibition on investing in residential property like a SSAS or SIPP.
Secondly, a QNUPS will not be caught by the Non-Resident CGT rules which will apply to investments in all types of UK real estate. As such, the trustees can dispose of UK real estate without incurring a CGT liability. Broadly speaking, no other non-UK entity would find itself in a similarly advantaged position.
Generally speaking, any UK source income directly received by the trustees will be subject to UK tax.
Where this is a trust-based arrangement then the Rate Applicable to Trusts (“RAT”) would result in any income being taxed at the highest rates. This is a far from ideal outcome. As such, it is preferable that any UK income is received via an underlying entity.
Further, one could consider using a contract-based scheme which might provide a more beneficial position as regards to UK income.
Non-UK income should be outside the scope of UK income tax. Other non-UK entities might be subject to complex anti-avoidance rules in this area but, in my opinion, a QNUPS established to provide genuine retirement benefits should be capable of keeping these at bay.
One area where there is general awareness is around the IHT treatment of QNUPS. As alluded to above, the actual QNUPS definition is taken from the IHT code. Essentially, any value comprised in a QNUPS will be outside the scope of an individual’s estate. As such, it provides an efficient tax wrapper for IHT purposes.
Further, the 10-year charge that applies to most trust arrangements does not apply to a QNUPS.
One observation I have made over the years on advising on QNUPS is the need for there to be a clear plan on taking benefits from the scheme and / or what might happen to the funds following the death of the member.
In relation to the first of these ‘exit’ issues, it is likely that when benefits are paid then, where the member is UK resident, those benefits will be subject to income tax. For someone who sets up a QNUPS close to taking benefits then they might have committed the cardinal tax sin of turning capital in to income.
Where the member is non-UK resident, then it is likely they can draw benefits free of UK income tax. However, they need to make sure of their position in their country of residence to ensure they haven’t jumped out of the frying pan in to the fire!
It should be noted that a capital sum could be taken from the scheme as a tax-free cash which would form part of the usual 25% limit.
Finally, any ‘exit’ plan should also remain fluid. There are few guarantees in tax other than the fact that the law will most likely be different in a few decades time!
QNUPS are not a magic tax bucket and are not a silver bullet to a client’s needs.
Instead, they are simply a useful tool to have in the toolkit. In the right circumstances, one might be able to use a QNUPS to achieve attractive benefits.
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