QNUPS - The Next Major Offshore Pension?

QNUPS - the next major offshore pensions planning opportunity for UK tax-relieved pension funds and the interaction with QROPS.

The Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI 2010 / 0051] came into force on 15 February 2010 and have introduced QNUPS.

The purpose was to correct an error in the Finance Act 2004.   Without these amending regulations UK pension funds once transferred to a QROPS would become liable to UK Inheritance Tax (IHT) charges. These regulations now mean a non-UK resident may transfer UK pension rights to a QROPS and upon death, whether before or after age 75, no Inheritance Tax liability arises.

These regulations apply to overseas schemes generally. But they have wider application for two reasons:

1.    taxable property rules associated with one form of QROPS and

2.    a restriction on the tax relief available on pension contributions to high-earning UK residents.

The Technical Side

To be a QNUPS the overseas scheme must satisfy the same conditions necessary for a Recognised Overseas Pension Scheme (ROPS) (SI 2006/206) with the important exception that there is no necessity for there to be Double Taxation Treaty (DTA) with the overseas scheme’s jurisdiction if the scheme is outside of the European Economic Area.  A DTA is not necessary because there are no reporting requirements from the QNUPS to HMRC.

The outcomes are that a QNUPS benefits from UK IHT exemption in respect of:

(a)    UK tax-relieved pension funds that have been transferred to a QNUPS.

(b)    contributions to a QNUPS and

(c)     assets held by a QNUPS generally.

A QROPS will by definition be a QNUPS. But a QNUPS need not be a QROPS. This leads to the feasibility of using QNUPS as an ultimate destination for UK tax-relieved pension funds to gain further advantage.

A QNUPS (which is not a QROPS), is a good home for UK pension funds which were originally transferred to a QROPS.  A QNUPS (which is not a QROPS) need have no specific investment restrictions and may for example invest in residential property and the like.  But the key to this is transferring from the QROPS to a QNUPS.

For clarification we need to differentiate between “investment regulated” and “non-investment regulated” QROPS. This is a consequence of SI 2009 / 2047,  effective August 2009. These taxable property provisions (relating to investment in residential property, fine wines, antiques, and the like) extend UK investment rules to some QROPS. If the QROPS is “investment regulated” then Paragraph 7A of Schedule 34 Finance Act 2004, provides for a 70% tax charge where investment is made into taxable property out of UK pension funds which have been transferred to the QROPS. But there are further implications.

What follows are direct quotes from the Registered Pension Schemes Manual (RPSM): “A transfer from a UK pension scheme to a QROPS constitutes a Relevant Transfer Fund”  (RPSM13102130). Then we have to consider whether that fund comprises a Taxable Asset Transfer Fund (TATF). All transfers from UK pension schemes to an investment-regulated QROPS since 6 April 2006 comprise a TATF.

This is important because: “A payment to a transfer member has to be notified to HMRC regardless of whether or not they have been non-resident for more than five tax years if it is deemed to have been made from their Taxable Asset Transfer Fund”  (RPSM14101070).

An investment-regulated QROPS means that the member is able to direct or influence the investments made. Most Guernsey QROPS have concluded that they are not investment regulated. Some have not declared their hand and one considers the distinction to be “immaterial”. New Zealand QROPS are not investment-regulated pension schemes.  Some Hong Kong QROPS have taken the same view. The same is likely to apply to schemes in Gibraltar, Isle of Man and Malta.

In my view it is vital to only transfer UK pension funds to a QROPS which is not investment regulated. It was originally thought that taxation consequences for the member relating to the TATF would only apply if the funds were used to acquire taxable property. However, correspondence with HMRC indicates that a transfer from an investment regulated QROPS to another overseas scheme which is not a QROPS is:

a)    reportable irrespective of time,

b)    not a recognized transfer and,

c)    taxable at 55% on the member.

If, however, a transfer is made from a QROPS which is not investment regulated to a QNUPS this transfer is:

a)    not reportable beyond five complete tax years of non-UK residence,

b)    not a recognized transfer but,

c)    not taxable on the member.

So if it is planned to use the QROPS fund to acquire taxable property it is best to transfer it to a non-QROPS (a QNUPS) once the member has been non-UK resident for five or more UK tax years.

If a QROPS is not investment regulated then once the scheme member has been outside of the UK for five complete tax years a transfer to a QNUPS should be contemplated. This should be to an identical scheme which is a complying QNUPS and which has not been registered with HMRC as a QROPS.  After such a transfer TATF status no longer applies and there is no HMRC reporting. But it is important to remember that it is only a non-investment regulated QROPS that can transfer to a QNUPS without a 55% unauthorised payment charge.

The Second Application Of QNUPS.

Persons in the UK earning over £180,000 p.a. will soon have limitations on fully tax-relieved pension contributions. These provisions are being introduced as the highest rate of income tax on earned income rises to 50%. Some will receive full income tax relief only on the first £20,000 of pension contributions and only 20% relief on the rest.

A UK resident may contribute to a QROPS (also a QNUPS) or to a QNUPS (not a QROPS) but will not receive tax relief on the contributions.

Candour Consultancy are authorised introducers' to all the leading QROPS providers and can advise on the most suitable scheme for your personal circumstance. If you have any questions or require any additional information, please click here to contact us.