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Expat Briefing Editorial Team
07 March, 2014
Following the recent announcement that Gibraltar is to introduce legislation allowing for something called a QNUPS to be set up in the jurisdiction, this week we take a look at the pros and cons of this highly flexible pension vehicle aimed at UK expats.
So What’s A QNUPS Then?
QNUPS are the latest addition to the alphabet soup of pension wrappers that can help expats save for their retirement. Standing for Qualified Non-UK Pension Schemes, they were introduced in the UK in February 2010 by the Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010.
One of the main advantages of a QNUPS is that it doesn't have to be included in a person's estate, and therefore, with the appropriate planning, funds and assets contained within a scheme will not incur UK inheritance tax, which at the moment stands at 40% of the value of an estate above a GBP325,000 threshold (the threshold was frozen for a period of four years in the 2010 Budget) in the UK. Death duties can also be avoided in the country of expatriation.
A QNUPS doesn’t enjoy the same tax advantages of its more well-known cousin, the QROPS. However, in many other respects a QNUPS is a lot more flexible than a QROPS.
Significantly, with a QNUPS there are no reporting obligations to HMRC. This means that unlike a QROPS, which are only available in countries which have a double taxation treaty with the UK and which remain under the watchful eye of the UK taxman for the first ten years (increased from five last year in an HMRC clampdown), a QNUPS can be used in a much wider choice of jurisdictions.
The scheme is also very flexible in a number of other respects, including:
Steven Knight, Chairman of Gibraltar Association of Pension Fund Administrators (GAPFA) stated that “the introduction of specific QNUPS legislation is a very welcome addition to the Gibraltar pension sector and based on current UK legislation provides absolute clarity over the use and taxation exposure of assets held by a Gibraltar QNUPS”. It is anticipated that legislation will be passed very shortly to ensure that the Gibraltar legislation is complete regarding QNUPS.
Gibraltar itself levies no Inheritance Tax, Wealth Tax or Capital Gains Tax on pensions held. Apart from the proposed 2.5% due on distribution, the only taxes that may be due are those that would apply to residents of other countries. For payments that have arisen from former UK residents, a QNUPS is expressly exempted from UK Inheritance Tax under Statutory Instrument No 51 (2010).
Whilst specific guidance should be obtained in all cases, Gibraltar is increasingly being found to be a leading location to place pensions. Over the past year the number of company members of GAPFA has risen to thirteen. A considerable number of pensions have now been transferred to Gibraltar, with the ultimate pension members being based throughout the world.
What Do Advisors Think?
The deVere Group, a prominent independent consultant on QROPS with close to GBP100m under advice on offshore pension schemes, representing nearly a quarter of all UK transfers to offshore pension schemes in recent years, believes that QNUPS will provide "many new benefits for people who live overseas".
"Pension schemes and effective retirement planning are essential for the rising number of people who choose to relocate or retire abroad. In recent years, Qualifying Recognised Offshore Pension Schemes enabled investors to transfer their frozen UK pensions overseas, and now the introduction of QNUPS promises another potential tax efficient way to save for retirement," the firm says. "These new schemes will benefit from a UK inheritance tax exemption in respect of UK tax-relieved funds that have been transferred to the QNUPS and will offer expatriates the option to continually pay money into a scheme once they have retired abroad, something that they were not entitled to with a QROPS.”
Angela South, managing director of Magna Wealth Management, suggests that investors looking for a safe home for their surplus funds should take "a long hard look at QNUPS".
“It became clear in certain cases that clients could not yet take advantage of QROPS, either because they had not lived abroad for five full tax years, or because of their age,” she said. “For those who own substantial assets and want these assets to grow in a tax-efficient pension and most importantly want to protect their assets against UK Inheritance Tax, then QNUPS is definitely something they should be considering.”
“You can transfer cash, assets or family wealth into a QNUPS and there is no absolute limit on contributions into a QNUPS," South continued. “Very substantial contributions are generally allowable, subject to your status, but you should personally retain enough assets to live on prior to retirement.”
“From age 55 you can take up to 30 per cent as a lump sum paid without deduction of any tax," she added. "If you need cash before age 55 you can take out cash, generally tax-free, as a loan."
But Too Good To Be True?
Angela South also observes however, that the financial services market has been slow to pick up on the advantages that QNUPS offer because, in many cases, "the benefits seemed too good to be true". And because QNUPS are still a relatively untried and untested pension scheme, QNUPS providers are still quite thin on the ground as compared to providers of QROPS.
There has been a notable rise in the number of wealth managers adding QNUPS to their list of savings and investment products in the past year or so. However, increasingly, it seems that advisors are recommending the use of QNUPS as a tax planning strategy rather than a retirement savings vehicle because assets can be placed outside of the UK inheritance tax net.
QNUPS were originally legislated to give UK citizens living abroad access to their retirement fund, and not to help people settled in the country to hide from inheritance tax, so it is rather unsurprising to learn then that HM Revenue and Customs (HMRC) is beginning to prick up its ears in the direction of the QNUPS sector.
HMRC hasn’t done anything about QNUPS-related IHT avoidance yet, and it has remain tight-lipped on the subject, but several pensions advisors are warning that the tax department could move at any time and without warning to close the QNUPS ‘loophole.’ And HMRC has form in this area too. When the tax man perceived that certain QROPS providers or jurisdictions weren’t playing by the rules, it immediately de-listed them.
Bethell Codrington, of QROPS provider Panthera, observes: “QNUPS are being promoted because members can put a holiday home in or borrow from it, but a pension is there to provide retirement income and you don’t get income from those things. There is a nervousness that HMRC will amend QNUPS rules if they believe they are mis-sold to bring it into line with QROPS.”
Rob Shipman, the director at Guernsey-based Concept Group, says: "There are dangers for any advisor who suggests to their clients that the sole purpose of the pension is simply to avoid UK inheritance tax. HMRC will take a dim view of this."
While HMRC already has tools in its anti-avoidance arsenal to tackle QNUPS-related tax planning schemes, the danger is that it could introduce new rules at short notice and make them retrospective to catch as many potential cases of abuse as possible. Penalties for non-compliance are likely to be heavy, so anyone caught out by a new crackdown could well be in for an expensive shock, and fighting HMRC can be a time- and money-consuming business.
As with any significant investment, but especially one as important as a pension, which could be your only means of financial support in old age, due diligence is vital. There is no one-size fits all solution here, and the type of pension vehicle you choose will be dependent on individual circumstances. Although QNUPS may sound like an ideal way to get out of the inheritance tax bind, it is still early days in their life and they should be approached with caution, especially with HMRC seemingly waking up to the unintended tax avoidance opportunities they provide. For expats, or those intending to become one, financial planning is already complicated – and costly – enough not to put your pension pot at risk. So it cannot be stressed enough that you do your homework and, above all, seek quality impartial advice.
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