Posted by James Pearson on 04 Jun 2014
Qualifying Non-UK Pension Schemes
Qualifying Non-UK Pension Schemes (QNUPS) are flexible retirement benefit schemes that provide alternative routes for individuals to plan for their future when standard approved UK pensions will not suffice.
They offer the potential for tax efficient growth and are an excellent tool for providing for your own and your family’s future needs. It is often the case that QNUPS are treated as a tax avoidance scheme by both promoters and beneficiaries, and such an approach will leave the structure open to attack by HMRC as well as encouraging poor investment decisions that do more damage than good in the long term.
This is not to say that QNUPS schemes do not offer attractive taxation incentives, but rather that decision making in relation to a QNUPS should always be driven by the aim of providing for the beneficiary’s retirement.
At Tax Innovations, we make sure that all retirement planning options are considered, meaning that a QNUPS will be recommended only if it is the best fit for your retirement needs. This is important because if a QNUPS is not a suitable vehicle from a retirement planning point of view, the tax savings that are possible are not sufficient to make a QNUPS investment worthwhile.
Having established that a QNUPS is a suitable structure around which to base your retirement planning, we ensure that your QNUPS continues to be both beneficial and tax compliant by focusing your QNUPS strategy on meeting your retirement goals rather than achieving short term tax savings that are easily attacked by HMRC.
This involves the use of independent financial advisers to guide decisions relating to contributions and investments, along with regular actuarial valuations of the fund to assess the extent to which retirement goals are being met.
It is important to keep in mind that a QNUPS is not an effective tax planning tool without being focused on providing for your retirement. This is because the taxation benefits are only of significant value if focused on long term investment and anti-avoidance legislation makes any tax-driven QNUPS planning ineffective in the face of attention from HMRC.
Tax Efficient Investment
By definition, a qualifying non-UK pension scheme must be a non-UK scheme, and as such outside the scope of UK capital gains tax and only exposed to UK income tax on UK source assets. Consequently, the primary tax saving offered by qualifying non-UK pension schemes is that investments made by the QNUPS should not be subject to UK capital gains tax and exposure to UK income tax is also significantly reduced.
This is not a tax saving that provides an immediate tax benefit since the profit on investments must stay within the QNUPS until retirement age is reached, and also because HMRC can attack any transfer of assets into a QNUPS that is primarily or even partially for tax avoidance reasons.
The benefit that the tax saving provides is that investment growth can be received tax efficiently allowing for greater reinvestment than would be possible if tax charges reduced the investment growth available for reinvestment.
Since a QNUPS is able to invest in a far wider range of assets than an approved pension scheme, with good investment choices, the tax free reinvestment could snowball, allowing growth to significantly outstrip what would be achievable in a less tax-efficient environment. Over time, the end result should be that you have a fund in the QNUPS to provide for your retirement that is significantly larger than would have been possible in an approved pension scheme or through personal investment.
Types of Investment
As was mentioned above, qualifying non-UK pension schemes are able to invest in a wide range of assets, and these could include shares or property already held by a beneficiary.
These could be particularly attractive investments since the beneficiary will have a good understanding of the growth potential, and especially in the case of shares in a personal company, may feel that he will be able to generate substantial growth through his own efforts, rather than relying on the more diverse and diffused growth offered by a traditional share portfolio.
As with all other investment it is important that the driving factor is retirement planning and that the sale of assets to the QNUPS is part of a structured and considered retirement plan. Growth potential in investments is important or you run the risk of putting yourself in a worse tax position by swapping a future capital gain, taxable at the relatively low capital gains tax rates if you retained the asset, for a future retirement income taxable at the higher income tax rates.
If an investment already held is likely to generate significant growth or income it could well make a suitable QNUPS investment, but only with an eye on generating sufficient growth in the tax efficient environment of the QNUPS to outweigh the cost of moving the asset away from capital gains tax and into the scope of the higher income tax rates.
Providing for the Future
When retirement age has been reached, you are able to take benefits from the QNUPS in the form of retirement income. This income will be taxable at income tax rates (although as an offshore pension, 10% of any retirement income taken is exempt from UK taxation) which is why it is important that the investment strategy has been focused on achieving growth, and taking advantage of the tax efficient investment environment that the QNUPS offers.
When the beneficiary of a qualifying non-UK pension scheme dies, the remaining QNUPS fund can be paid, free from inheritance tax according to the pre-agreed wishes of the beneficiary.
This is a significant tax relief and HMRC have recently announced that they intend to review the inheritance tax treatment of QNUPS in order to target any abuse of this relief. At present there are no details of the actions that HMRC will take although their stated aim of aligning the inheritance tax treatment of QNUPS with those of approved pension schemes should mean that you will be no worse off from an inheritance tax point of view than if you had contributed to an approved pension scheme.
The other QNUPS tax benefits are not under threat. It is also likely that any change to the IHT treatment will only relate to contributions made after the change of legislation giving an incentive to maximise contributions at this time.
Contact Tax Innovations
Tax Innovations can work with you to establish a QNUPS that provides real, secure, long term benefits that build for your future, while using our years of experience to ensure that the tax benefits available are maximised.
If you would like any advice regarding qualifying non-UK pension schemes or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or email@example.com
- Top 10 Expat Tax Tips for Individuals Moving to the UK
- Incorporation of Property Portfolio
- Non-Cash Employee Benefits
- The Import One-Stop Shop (IOSS) for EU VAT
- VAT changes affect employee benefits