UK Inheritance Tax (IHT) is usually paid on an estate when somebody dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. The Inheritance Tax threshold (or ‘nil rate band’) is the amount up to which an estate will have no Inheritance Tax to pay. Since April 6, 2009, the nil rate band are for estates up to £325,000. Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000.
If the estate – including any assets held in trust and gifts made within seven years of death – is more than this threshold, Inheritance Tax will be due at 40 per cent on the amount over the nil rate band.
For many olim from the UK, their estates will remain subject to IHT even after Aliyah. Among many reasons, that could be because they are still considered domiciled in the UK (as will be the case for most olim) or if the oleh still holds property in the UK.
QNUPS were created through The Inheritance Tax Regulations 2010, which came into force on 15 February 2010. Before A Day – 6 April 2006 – protection from UK Inheritance Tax applied to certain non-UK pension schemes. (Pension tax simplification, often simply referred to as “pension simplification” and taking effect from A-day in 6 April 2006 was a policy announced in 2004 by the Labour governmentto rationalise the British tax system as applied to pension schemes.) When the changes were made on A Day, this exemption was inadvertently omitted and, without this having been corrected, UK pension funds, once transferred to a QROPS, would have become liable to UK IHT charges. The Inheritance Tax Regulations 2010 corrected the earlier omission.
Being a Qualifying Non-UK Pension Scheme, a QNUPS must broadly satisfy the same conditions as that of a ‘Recognised Overseas Pension Scheme’. Importantly there are no reporting requirements to Her Majesty’s Revenue and Customs.
What Level of Contributions Can be Made?
Based upon one’s worldwide assets and lifestyle, an actuary will be able to establish the level of retirement benefit required to sustain your standard of living in retirement, taking other retirement schemes into account. Any shortfall can be made up by paying the difference into a QNUPS.
When Can Contributions be Made?
Contributions can be paid at any time but must be for the purpose of providing retirement benefits. If it is deemed that the reason for the contributions to a QNUPS is for tax avoidance it will not achieve the exemption from IHT. This is particularly relevant where the member is in ill health or is terminally ill.
Advantages of QNUPS
- No limit on contributions but subject to an actuarial calculation
- No need to have any employment (relevant) income to make contributions
- Can be funded by contribution, transfer from an International Pension or QROPS
- No capital gains tax
- No UK income tax on non-UK source income from investments
- No lifetime limits on fund size
- No investment restrictions, multiple currency options
- UK IHT and local succession taxes may not be payable from the QNUPS fund upon death
- QNUPS should avoid local succession law, enabling the client to control who inherits
- Flexible income can be deferred until age 75
- If UK income tax is due, only 90% of the income is taxable
- Ability to take a 25% tax free lump sum of the fund value (sometimes up to 30%)
- There is no requirement to purchase an annuity
- No reporting requirements to HMRC
It is not possible to transfer a UK pension directly to a QNUPS. UK Pensions should be transferred to a QROPS. For those returning to reside in the UK, there may be some advantages to transferring a QROPS to a QNUPS.
Who would consider a QNUPS?
- Expatriates saving for their retirement who may wish to return to the UK in the future
- High net worth UK residents or domiciled individuals who have already utilized their maximum income tax relievable pension contributions
- Anyone who, after 6 April 2010, will become restricted to basic rate income tax relief on UK pension contributions
- Individuals wishing to transfer from an International Pension Plan – IPP
- Individuals wishing to transfer from a QROPS
Taxation of Benefits Paid from the QNUPS
The possible benefits payable under a QNUPS include benefits on retirement (including a lump sum of up to 30% of the fund and an annuity/pension for life), benefits on incapacity and early retirement and death benefits.
If the member is non-UK resident, there will be no UK tax charge on any payments to them from the QNUPS. They may of course, be taxed in the jurisdiction in which they reside. A UK resident would pay tax on 90% of the pension income paid from the QNUPS.
Loans to Members
If the member has not retired, a loan may be granted to them. It is vital that the loan is commercial in all senses and not just in terms of the interest rate which applies. The loan will be an investment by the Trustees and therefore all the usual due diligence on the loan and the member’s ability to repay which a prudent Trustee would undertake before making an investment would be carried out.
You should review the rules in which the QNUPS resides to determine if loans are permissible and to what extent – as not all jurisdictions allow loans to members.
QNUPS can be used by UK residents as a flexible mechanism for providing retirement benefits. They are particularly useful as “top-up” pensions if an individual has not made sufficient provision for their retirement via their registered pension.
It is important that the contributions made to a QNUPS are proportional, both to an individual’s overall wealth and to what is necessary to provide them with appropriate retirement benefits, taking into account any other existing pension rights they have.
Due to the possible application of the unauthorised payment provisions, we do not recommend that an individual’s employer contributes to their QNUPS.
Benefits from a QNUPS received in the UK will be subject to Income Tax, depending on the type of benefit received. In many cases, it is possible for a pension commencement lump sum to be taken from a QNUPS without any UK tax.
Expatriates can use a QNUPS as a tax advantageous home for their long term savings, creating a safe haven for their wealth now and in the future should they return to the UK.
HCC International Services Ltd and STM Group are working together to provide QNUPS to UK residents and to olim (new olim or vatikim) who are subject to IHT.
Chaim Wigoda is the Managing Director of HCC International Services Ltd — an Israeli company that provides tax and financial planning services for olim. Chaim can be contacted at 972-(0)54-309-1867 email: email@example.com
David Erhardt is the Managing Director of STM Fidecs – a subsidiary of the STM Group. The STM Group is listed on the London Stock Exchange with offices in Gibraltar, Jersey, Malta, Switzerland and Spain. David can be contacted at firstname.lastname@example.org.