QNUPS Tax Advantages - Part 2

Last week we updated on the new Qualifying Non UK Pension Scheme (QNUPS) introduction. This legislation was passed in February 2010 to deal with the treatment of assets for UK inheritance tax (IHT) purposes. The schemes broadened the scope of available assets allowed to be held in a QNUPS as opposed to a Qualifying Recognise Overseas Pension Scheme (QROPS). A QNUPS also has other flexible features such as not requiring reporting scheme details for individual members to HMRC for the initial five years. Outside of that limitless contributions by the pension owner may be made into a QNUPS.

These schemes have been marketed by some advisers as all encompassing UK IHT avoidance vehicles. If this were the case the UK government would surely find it easier to abolish IHT altogether.

Many people lose sight of the fact that the final two letters ‘PS’ stand for pension scheme. No matter what happens a scheme is set up with the intention of providing a lifetime pension to the member from the retirement age of 55. Such schemes must follow the HMRC rules relating to the administration of pensions even though they may not have a mandatory reporting duty to HMRC. If the scheme trustees act outside these guidelines they stand to lose their ability to conduct any future business in these areas.

Many expat readers here will be saying “So what. How does this affect me?” The fact that under European regulations the UK had to introduce such schemes for compliance has led to expats enjoying these benefits. These are the most significant advantages offered to expats for a very long time.

So, should you be looking to start a QROPS or a QNUPS? If you have a simple situation where you have one or more deferred UK pensions and you are now abroad, it is likely that a QROPS is okay for you. However, it would be best to seek professional advice on your entire situation to ensure you are making correct long term decisions.

If you have other assets outside your pension scheme and are UK domiciled, you probably have an exposure to UK IHT which can be reduced under many circumstances. Individual assets may be exempted from UK IHT by transferring them into a QNUPS. Such assets may not be allowed in a QROPS, which is basically limited to liquid assets and commercial property. However, assets in a QNUPS may include physical assets, which open the door to almost anything.

Take John. He is British, 51 years old and has a non UK domiciled wife. He also has a deferred UK pension. He has been an expat for 12 years and has built up a UK based 'buy to let' portfolio of some 32 properties, currently valued at £6,800,000. All properties are let and 14 have mortgages totalling £1,800,000. They produce an annual income of £220,000 on which UK income tax must be paid. John also has 5 properties in Thailand valued at the equivalent of £800,000. He also has £250,000 in liquid assets.

John sees a professional adviser who recommends that he transfers his UK frozen pension to a QROPS. Further he should start a QNUPS and place his UK properties in this vehicle. This will take the properties out of the IHT net but not his entire estate. The Thailand properties will remain outside the QNUPS. He will also still have his liquid assets. John’s exposure to IHT will reduce from £2,290,000 to £290,000.

The mortgages can be re-arranged within the QNUPS. The UK based rental income will still be subject to UK income tax. The only way to discontinue this is to sell the UK properties in favour of investment assets within the QNUPS physically held outside the UK.

Some may argue that this move is a UK IHT avoidance scheme and will not work when HMRC assess John's estate after he dies. One of the main arguments for this is that the property assets are not capable of generating sufficient pension income. This is not so. If we take the net assets of £5,000,000 and calculate how much pension income assets of this magnitude would produce, the answer would vary according to the individual. In this case it would be approximately £240,000 per annum. The property portfolio is currently producing £220,000. Thus the assets comply with the rules for a QNUPS in this respect.

Something John must also remember is that once he has transferred assets into his QNUPS he cannot subsequently remove them. They must produce a retirement income for him. Also, the retirement income cannot begin until he reaches retirement age of 55. He must be sure that he has sufficient income from now to age 55. Once he has set up the QNUPS the capital value of the assets are not available to him any longer. He may withdraw the 25% of capital value as a tax free lump sum prior to taking pension payments and the scheme may be structured to draw this in stages.

QNUPS can be a very good facility depending on your personal circumstances. They need very careful analysis and evaluation by a professional adviser so if you feel this could be right for you seek expert help.

Questions to the author can be directed to PFS International on +66 (0) 2653 1971 or email to enquiriesthailand@fsplatinum.com.