Is it really time up for QNUPS?

Is it really time up for QNUPS?

Last week I saw an article suggesting that QNUPs are being sold as tax avoidance vehicles. 

This is a surprise as, firstly, I don’t come across many people talking about QNUPS at all. But then, I am just me, and perhaps they’re doing it secretly behind my back,

Secondly, unless one can demonstrate that it is set up for genuine pension provision, then any ‘favourable’ tax analysis fails like a pack of cards.

Finally, a QNUPS is not a free for all. It must broadly mirror the same rules regarding the drawing of benefits (and the taxation of those benefits) as those for registered pension schemes. As such, like any other pension arrangement, at some point one must take benefits and the majority, like a registered scheme, must be taken as income. Assuming you are Uk resident at the time, then this is taxable when received. 

This means that, at best, one is probably only deferring tax. At worst, one might be embarking on the worst course of action possible from a tax point of view.

As such, the devil is not so much in the detail, but in the exit plan…

The legislation

First things first, a Qualifying Non-UK Pension Scheme (QNUPS) is not really a specific product. It is merely a tax status.

This particular status comes, in the first instance, from Inheritance Tax (“IHT”) code.

That said, the statutory provision acts as little more than a signpost to key statutory instruments. It is this secondary legislation that adds meat to the statutory bones.

But what is a QNUPS?

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 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 - but means that the scheme must broadly be run on the same basis as a UK scheme in terms of the form and timing of benefits.

What a QNUPS is not

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!).

A QROPS scheme will be almost identical to a QNUPS. However, those operating the QROPS will also 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 relieved 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.

So, QNUPS usually only take fresh new contributions of cash or assets and not transfers from existing schemes.

Contributions to a QNUPS

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. 

As such, a QNUPS is sometimes 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 (but no relief either). 

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. 

For example, a QNUPs, if the trustees agree, can invest in UK residential property without suffering a penal tax charge.

Assuming that any contribution is in cash, then there should not be any capital gains tax (“CGT”) or Stamp DutyLand Tax (“SDLT”) implications. One needs to take more care where one is contemplating the contribution of an asset to the QNUPS. This might, for instance, trigger a taxable gain or, for UK real estate, an SDLT liability. 

On the basis that the contribution is being made to secure genuine retirement benefits, there should not be any IHT consequences of the contribution.

However, where it cannot be justified (say, by an actuary or similar) then the IHT position is likely to be a whole lot more precarious. Most providers, in my experience, will require such an exercise to be undertaken before setting one up.

Ongoing tax position

CGT

The QNUPS, as an Overseas Pension Scheme, will have a statutory exemption from CGT in much the same manner as a UK registered pension scheme.

 

This means, like a registered pension scheme, a QNUPS is outside of the Non-Resident CGT rules which will apply to almost all other vehicles that are making investments in UK real estate.

Income tax

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. 

Non-UK income should be outside the scope of UK income tax subject to dealing with complex (personal tax) anti-avoidance rules in this area.

Again, if it can be demonstrated that the QNUPs is established to provide genuine retirement benefits then these might be managed.

But such an ‘exemption’ would need to be claimed so this needs to be dealt with properly at the outset. 

IHT

As mentioned 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.

But, again,  this isn’t really any different to a registered pension scheme.

Exit

One observation I have made over the years 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. A reverse alchemy. 

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.

Conclusion

A QNUPS is not a magic tax bucket and is not a silver bullet to solve all a client’s needs.

Used properly, they are not a tax avoidance vehicle.

Used as a tax avoidance vehicle, rather than a genuine pension, then one might find the tax analysis comes crashing down around your ears.