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Malcolm Gunn for Tax Insider highlights an arrangement which offers potential significant IHT savings.

Introduction

Non-Resident Pension Schemes can offer significant IHT savings. Relatively new to the market place are offshore pension schemes known as QNUPS - Qualifying Non-Resident Pension Schemes.  They are governed by regulations issued early in 2010 and are beginning to appear in various offshore jurisdictions, such as Guernsey and Malta. What makes them most interesting from a UK tax point of view is that they have numerous statutory exemptions from Inheritance Tax (IHT). 

What are ‘Qualifying Non-Resident Pension Schemes’?

QNUPS are private personal pension schemes not qualifying for any Income Tax or Capital Gains Tax (CGT) reliefs. So there is no tax relief on putting funds into them. Equally they benefit from no particular Income Tax or CGT exemptions, although much of the marketing literature says that they are free of CGT.

That is of course true in itself, since they are based off-shore but there is nothing to exempt them from the various Income Tax and CGT charges on UK resident settlors. However, these charges can of course be mitigated by various means. Funds can be invested in any type of assets at all, including residential property. 

Inheritance Tax (IHT) Relief

The statutory IHT reliefs are however of greater interest. There is no specific exemption in the IHT legislation for contributions made to the pension scheme by the scheme member, but nor is there for contributions to any onshore SIPP (Self-Invested Personal Pension).

The reason for this is that the funds must be held primarily to provide a pension for the scheme member and normally those rights will be of such value that the gift element in the death benefits is not significant at the outset. It would be seen therefore that is it is not possible to use QNUPS as a means of IHT planning for the elderly. The attractions of QNUPS are therefore mostly for those coming up to retirement age and who are in good health.

Inheritance Tax Benefits

Once funds are within the QNUP, the IHT benefits start to apply. The scheme will be a form of discretionary trust but there is exemption from the normal ten-yearly charges which apply to such trusts. There is also exemption from IHT on the death of the scheme member for his interest in the fund, unlike SIPPS where a flat 55% tax charge applies. This year’s Finance Act adds yet another exemption: no IHT charge can arise on failure to take benefits from the scheme.

There is no exemption from the IHT ‘gift with reservation of benefit’ provisions, but these should not apply in any event because the person setting up the scheme retains the rights to income only, and gives away the death benefits at the outset. This type of arrangement is what is known as a “carve out” to which the reservation of benefit rules do not apply. 

Practical Tip

All in all therefore, QNUPS enable funds to be placed in a form of family discretionary trust where the settlor keeps rights to pension income from aged 55 onwards and gives way the capital as death benefits available to his or her family. The schemes are primarily targeted at those who plan to become non-resident at some stage in the future but they are not limited in that way and UK residents can set them up as well.

About The Author

Tax Insider publishes monthly newsletters and reports for everyone with an interest in responsible tax saving, including professional advisers, business owners, entrepreneurs, property investors and other UK taxpayers.

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