What is a QNUPS?
A Qualifying Non-UK Pension Scheme (QNUPS) is not a product, although a product may be designed such that it is a QNUPS. Apologies for going all Confucius on you dear reader, however, a QNUPS is merely a tax status.
The QNUPS categorisation comes in the first instance from the IHT code. At Section IHTA 1984, s271A we are given little more than a signpost to the definition of a QNUPS. That signpost refers us to the regulations that may be found in a Statutory Instrument SI 2010/51 – Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 (“The Regulations”)
Basically, a QNUPS is a type of international pension scheme. That said, it is not the same as a QROPS and one should take care not to mix up these acronyms. A QROPS may be a QNUPS but a QNUPS is not necessarily a QROPS! We will go in to this in more detail below.
A word of warning. A QNUPS is a pension scheme and should be used as one. Ultimately one should assume that its main purpose is to provide an income in retirement. We often stumble across this type of arrangement being used overtly as IHT planning devices. Our view is that where this is the case, much of the tax analysis below becomes much more precarious. So be warned.
As stated above, the real meat is not found in the IHT legislation, but in SI 2010/51. This sets out a number of hoops that the scheme must leap through to qualify.
First of all we must meet the recognised locally for tax purposes. This requires the scheme to be open to locals AND for the scheme to meet a tax relief test. The tax relief test requires that the scheme either provides no tax relief on contributions, is subject to tax on its income and gains OR all or most its benefits are subject to tax. If BOTH of these limbs are met then it is necessary that there is a system of approval in the relevant jurisdiction for pension schemes. If not, a separate test applies which we will not consider here.
If the scheme is recognised locally for tax purposes then we need to identify whether there is a regulating body. If there is then we are home and hosed. If not, then the scheme must be established in EU, Norway, Iceland or Liechtenstein and must pass the pensions benefit test. The pension benefits test essentially means that the scheme must pay out a minimum of 70% of the value of the fund as an income for life and benefits can only be taken in similar circumstances to a UK registered pension scheme.
We have very much condensed the rules here. In reality, these rules are vast and complex. We have advised a number of overseas providers on meeting these conditions, if you would like further information then please get in touch as we will not consider any further in this note.
QNUPS v QROPS
As stated above, the QNUPS is a different beast to the QNUPS. A QNUPS allows a taxpayer to build up a separate pension pot to his existing affairs. It cannot accept transfers from a UK registered pension scheme without a tax charge. However, a QROPS can. As one might expect, this means that a QROPS will usually need to meet a higher threshold and will have ongoing reporting requirements to HMRC.
Whether a scheme will a QROPS or not follows a different path. The requirements build first through the definition of Occupational Pension Scheme (“OPS”) and then through the conditions as to a Recognised Overseas Pension Scheme (“ROPS”). The final letter of the acronym, the “Q” is largely a covenant by the ROPS Provider to make certain reports to HMRC.
So, as we said above, a QROPS will inevitably be a QNUPS but a QNUPS is not necessarily a QROPS…
Tax – contributions
This article will look at QNUPS from the perspective of an individual making a contribution to a QNUPS only (in other words, we will not consider employer contributions).
There will not usually be any income tax relief available on any contributions to the scheme. However, such contributions will not use up or fetter the individual’s annual allowance. This makes the QNUPS a useful ‘top hat’ pension scheme. One might decide to bank the maximum tax relief in a particular year on contributions to a registered pension scheme. However, one might validly decide that, once the tax relief has evaporated, a contribution to a more flexible pension scheme was more desirable. Certainly, we see the opportunity for control and a wider choice of investments a driver for this type of arrangement amongst entrepreneurial clients.
From an IHT perspective, the legislation affords an employer contributing on behalf of his employees a statutory exemption. However, our view is that this does not apply to contributions made by an individual. That said, our view is that such a contribution will not be a transfer of value on more basic principles.
Depending on the provider, one might want to make contributions in specie. Clearly, where an asset is standing at a gain then there is likely to be a CGT liability on the transfer of the asset (subject to any available reliefs etc). If the property being transferred is UK real estate then, assuming no actual or deemed consideration, there should be no stamp duty land tax (SDLT) on the transfer. Of course, the precise analysis will depend on the form of the QNUPS.
Of course, a cash contribution should have no CGT or stamp tax implications.
Tax – ongoing
From an income tax point of view, we should not have any issues with the main anti-avoidance rules relating to settlor interested trusts or the transfer of assets abroad legislation. Both of these would cause the income of the arrangement to be attributed to the member of the scheme.
Any UK source income which is received directly by the arrangement – whether a trust or contractual arrangement – will be subject to UK tax. Where the arrangement is a trust based arrangement this is likely to be at the Rate Applicable to Trusts (“RAT”) which, without beating around the bush, is not a good outcome. Of course, any UK income could accrue via a wrapper as the RAT should only apply to UK income. The position is likely to be better for a contractual arrangement which will probably suffer tax at lower rates.
Where UK property – commercial or residential is held, whether directly or through a wrapper – then the Non Resident Landlord scheme is likely to apply.
Where UK residential property is held by the Trustees directly then the pernicious new rules restricting interest relief are likely to apply. The position might be helped where the arrangement is contractual or the properties are held through a Company though one would also need to consider other issue.
If the arrangement was to hold shares in UK companies then it might be efficient to hold these through a non-UK corporate entity as it should be possible for such a vehicle to receive dividends free of tax
From a CGT point of view, there has always been an enduring basic principle of UK taxation that, subject to anti-avoidance rules, a non-UK resident person does not pay UK CGT regardless of where the asset may be located. However, as part of the former Chancellor’s attack on buy to let landlords, a carve-out was applied to these rules such that any part of a gain arising after 6 April 2015 on UK residential property is within the scope of UK CGT.
However, our view is that a QNUPS should be capable of being structured such that it falls outside of these Non-Resident CGT (NRCGT) rules.
A sale of UK shares or commercial property is not within the NRCGT rules in any event.
Where a QNUPS acquires new properties then it will need to bear in mind that it will probably suffer the 3% additional rate applicable since 6 April 2016 in addition to the normal SDLT rates where it is acquiring UK residential property.
Don’t forget if one holds any UK residential properties (in excess of £500k) then the Annual Tax on Enveloped Dwellings (“ATED”) will need to be considered. Even where the properties are let on commercial terms to unconnected parties then relief will need to be claimed.
The QNUPS status means that the value held within the QNUPS will fall outside of the estate of any person for IHT purposes. Interestingly, from April 2017, where clients are non-domiciled and can no longer rely on the definition of excluded property in respect of protecting UK residential property from IHT, a QNUPS may provide some protection.
The Lifetime Allowance is not relevant to funds in a QNUPS.
Tax – drawing benefits
It is likely that when one comes to take benefits then one is largely capable of taking up to 30% as a capital sum and the balance as a pension income.
Any income in the hands of the recipient will be subject to income tax as one might expect. However, as this is a foreign pension, then it is likely that only 90% of this will be brought in to account.
What about the capital sum? In our view it is at least arguable that one could receive a capital sum from the arrangement without being subject to tax. However, as with many things in tax these days, it is not clear-cut.
Summary of potential attractions
- Outside the scope of the annual and lifetime allowance, so offer an attractive ‘top hat’ pension scheme;
- Contributions should not constitute a transfer of value for IHT purposes, though will not attract income tax relief;
- Care should be taken on contributions in specie if assets are standing at a gain;
- It should be possible to hold income producing assets in a tax efficient manner – although where there is UK source income, such as UK property, there will be a UK tax liability at some level in the structure;
- It should be possible to arrange the scheme such that UK residential property is outside of NRCGT. Other property should fall outside of UK CGT under basic principles;
- When one takes a pension income from the arrangement then 90% of that income will be subject to UK income tax (assuming one is resident in the UK at the time.)
- The value of funds within the QNUPS should be outside of the scope of IHT.
We trust that this has been a useful note and has perhaps got the mental cogs whirring.
Don’t for one minute think we are saying that QNUPS’ are a silver bullet (or indeed any other flavour of bullet) because it is not. However, they are a useful tool and should be considered along with other structures in planning a Client’s affairs, particularly in respect of retirement. As the tax relief for registered pension schemes is eroded, Clients are increasingly turning up their noses and looking at arrangements with a greater degree of flexibility.
So we may not necessarily be going nuts for QNUPS, but you would be nuts to ignore QNUPS!
If you have any comments or queries about this article then please get in touch.