I do not intend to spend this article going into great detail about how and why they came into being – this has been done many times before. In short, an omission in the original QROPS legislation of 2006 meant such overseas pensions could have been subject to IHT, which is not the case with UK pensions. So in February 2010, HMRC rectified this with Statutory Instrument 2010 /051.
This provided for the creation of IHT-exempt overseas pensions, in the form of QNUPS. The statutory instrument defined that all QROPS are also QNUPS, that is to say they benefit from the IHT exemption.
But, crucially, not all QNUPS need be QROPS. To put it in context, two identical pension schemes could be established outside the UK. One is registered with HMRC and therefore becomes a QROPS; the other is not, but by virtue of it being a qualifying pension as defined by UK law, is instead a ROPS (Recognised Overseas Pension) and therefore also a QNUPS. By not registering with HMRC, it is free of all the reporting requirements to which QROPS are subject.
QNUPS were therefore effectively an entirely new structure, enshrined in and fully protected by UK law. Just as importantly, they possess certain unique features that created significant planning opportunities for clients in the right circumstances.
UK tax residents
QNUPS are suitable for UK tax residents and non-UK tax residents, but it is the former I will focus on here because the advantages for UK expats are well documented.
To be clear, only UK residents considered high net worth or ultra-high net worth are really suitable for QNUPS. To my mind, clients should have at least £500,000 of surplus assets (or very significant earnings), for them to consider QNUPS and they may have used up – or be likely to use up – their UK tax-relieved pension lifetime allowance, which falls from £1.8m to £1.5m from 2012. Your client may already be using their full £50,000 annual tax-relieved pension contribution allowance.
So if you have clients who have substantial net worth or extremely high income and are quite possible near to the limits of UK pension provision, QNUPS should definitely be considered.
Foremost among QNUPS’ attractions is that any assets placed in them are generally immediately 100% IHT-free. This differs from a UK pension, where, if death benefits are paid from any company or personal pension after tax free cash has been taken, although there is no IHT, a 55% tax applies on death.
It should be taken into account that there is always the possibility of HMRC challenge, if it felt that the scheme has been used, for example, as death bed planning.
However, it also important to note that there is no penalty charge for this and the client would just be returned back to where they were (less fees) if they had not contributed to the QNUPS. But we strongly advise against using QNUPS in circumstances which HMRC might challenge.
I am at pains to stress that QNUPS must be used as a pension, and any contributions must be appropriate and proportionate to their personal situation. Some people have questioned how £500,000 or more can be considered a valid pension contribution – this is very naïve as commentators seem to believe this is simply too much money.
However, with our experience of UK pensions over the years, we know of many clients particularity in UK Registered SSAS Schemes where this would be considered only a medium sized contribution. And if you look at old style UK FURBS this would be considered a small contribution. So this is clearly not a valid concern and what constitutes an appropriate contribution depends on an individual’s wealth and personal circumstances.
You certainly cannot put everything you own into a QNUPS because you need to retain enough funds on which you can live in a comfortable manner. Nevertheless, it is conceivable that a wealthy client could contribute many millions of pounds.
After all, the assets that a person owns, beyond those they rely on for their day-to-day living costs, have arguably been built up to help fund a person’s life after the point they stop accumulating wealth. On that basis, there is significant scope for contributions – there is in fact no cap on the value of contributions, unlike with a UK pension.
"Any assets"
Another extremely attractive feature of a QNUPS is that virtually any asset, provided it should appreciate, can be placed in one. So property, art, classic cars are all eligible, plus much more besides. Brooklands would strongly recommend against a client’s main residence being held within the pension, as our experience of dealing with old style FURBS has shown this open to the possibility of a HMRC challenge. Beyond that, provided it is an investment that a trustee would be willing to hold with good legal title, it is possible.
On death, beneficiaries receive funds gross without any deduction of tax. Depending upon the circumstances it may be appropriate for benefits to go directly to beneficiaries or to an offshore trust.
Assets within a QNUPS can also grow free of capital gains tax and income tax, in the same way as do those in an offshore bond. However, there has been some uncertainty about this. Some have doubted whether income and gains can roll-up tax free for UK residents.
We have considered expert opinion from QCs, tax advisers, trustees and other relevant professionals, all of whom have concluded QNUPS do indeed enjoy gross roll-up.
Nevertheless, in the product we constructed, we decided to provide clients with an added layer of protection in order to ensure full tax-efficiency. To this end, we provide the option of adding an offshore bond to the structure, the gross roll-up benefits of which are well-known, understood and fully accepted by HMRC.
Using an offshore bond also provides administrative simplicity and opens up a range of options for any beneficiaries who receive the assets left in a QNUPS on the death of its originator.
A further interesting benefit of a QNUPS is that you can take loans, which are generally tax-free for UK residents. Such loans, which can be taken at any age, subject to trustee approval, can be used to provide an income or for any other use. It should be noted that loans will be subject to commercial rates of interest, payable back to the QNUPS.
As with any pension, gross-paid lump sums are also permitted. The value will depend on the jurisdiction of the QNUPS, with the Isle of Man permitting up to 30% at 55, the earliest point of retirement permitted by Manx pension regulations.
In conclusion, despite some early doubters, QNUPS present a huge financial planning opportunity for the appropriate client. Their IHT, income tax and CGT benefits are extremely powerful and should not be ignored.
