QNUPS

Location Location Location

By Andy Oliver

Never has the phrase ‘location, location, location’ been more poignant for the British expatriate.Forget ‘worst house, best street’ as your home - buying strategy.In fact, forget about your property and the street altogether for a moment.Instead, think about the crucial issues of your residency(where you currently live and are accountable for tax) and where you are from(where the final reckoning for Inheritance Tax lies).

The former US Secretary of State Donald Rumsfeld once said: “There are known knowns;things we know we know.There are known unknowns;things we know we don’t know about;and then there are unknown unknowns”.It is this series of questions which often beguiles British expatriates when faced with tax planning, especially in the area of Inheritance Tax(IHT).

Significant numbers of British nationals have now become expatriates whether to work or retire abroad.Some of the decision - making process is a lifestyle choice, but some of that decision is based around wealth and the levels of taxation that they or their beneficiaries will ultimately face.Ultimately, ensuring we know our domicile and account for this when planning means we can affect the outcome rather than leave this as a known unknown, or even worse, as an unknown by refusing to plan.

A thorny issue for expats - inheritance

Those who are both UK domiciled and UK tax resident will be subject to UK tax on their worldwide income and capital gains and, upon death, UK IHT would be payable on the value of their worldwide estate. However, if you are UK domiciled but not resident or ordinarily resident in the UK, you have no liability to UK income and capital gains tax (except on some UK source income) but you are liable to UK IHT on your worldwide estate.

One of the thorniest problems from a tax perspective has been tackling IHT for expatriates. This is because of the restrictions that domicile status imposes on the planning process dragging in cross-border jurisdiction to the debate.

Most UK expatriates fail to realise that they remain subject to UK IHT until Her Majesty’s Revenue & Customs (“HMRC”) agrees otherwise - even if they have not lived in the UK for many years. The rate of IHT is 40% of the amount by which the total value of their worldwide estate exceeds the nil rate band (currently £325,000) and liability to UK IHT often comes as a nasty surprise to the family of a deceased UK expatriate.

New rule helps expats

On 15th February 2010, a new UK HM Revenue & Customs(HMRC) rule came into force, which creates significant opportunities for British expatriates: to save local taxes in the country in which they are tax resident as well as UK IHT.

UK legislation has created a new type of trust, known as Qualifying Non - UK Pension Schemes(QNUPS), not to be confused with Qualifying Recognised Overseas Pension Schemes(QROPS).

Pension schemes are one of the key ways that most governments across the world incentivise people to save for their retirement.The incentive is often in the form of tax efficiencies, reliefs and exemptions.This means that the overall tax rules are generally more favourable than other tax - efficient structures.

You can use a QNUPS whether you are a working or retired expatriate.Crucially, the QNUPS solves different problems and offers different opportunities for both.

The problem for most retired expatriates is that they believe that their days of being able to put money into pension schemes are behind them.They also believe that pensions are inefficient due to the‘poor value’reputation that the press has given pensions with the semi - compulsion to purchase an annuity.However, QNUPS may significantly change many retired expatriates’views.

Working expatriates are often unable to contribute into a tax relievable structure;however, QNUPS can offer them all of the other benefits available, especially the extraction of wealth in a tax - efficient manner, usually the most difficult issue to solve.

So what are the benefits of a QNUPS ?

Crucial to the argument is that a QNUPS is a pension scheme trust.You are therefore entitled to take a cash lump sum and income during your lifetime as with a normal traditional pension, with the remainder of your fund being able to be passed to your spouse or estate on your death free from all taxes.Depending on the territory in which the‘retiree’is resident, other favourable and tax efficient methods exist to withdraw income.

The following advantages are available to you through a QNUPS :

As a pension scheme, a QNUPS is very tax efficient in most countries as it can avoid both local wealth taxes during your lifetime and succession taxes on your death.

A QNUPS also avoids local succession law, you are free to choose exactly who inherits your money and in what proportions.

Income can be taken from age 55 and must commence at least by age 75.Paradoxically, contributions can be made after this age, and the effect is essentially to increase the amount of income that can be taken whilst still providing the immediate IHT benefits.

When income is taken, it is drawn down from the fund, thus leaving your scheme assets invested.Otherwise the assets grow free from both UK and local taxes.

On death, the value of the QNUPS will be exempt from UK inheritance tax and most local succession taxes.

A QNUPS offers considerable investment flexibility and choice.Furthermore, your assets can be invested and any benefits taken in a currency of your choice, giving you the opportunity to remove currency risk.

The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme.You can have both a QROPS and a QNUPS.

In essence, QNUPS allow retired British expatriates to put their investable wealth into a pension structure and significantly improve their personal tax position and that of their heirs as a result.

Solving the UK inheritance tax conundrum with a QNUPS

Until now, the only way to avoid UK inheritance tax was to become a non - UK domicile, which is not the same thing as becoming a non - UK resident.It can be very difficult to shrug off your UK domicile even though you may have lived overseas for many years.As a result, your estate on death can be liable for tax of 40 % .

A QNUPS immediately solves this problem, even if you were to return to live in the UK.In fact, it avoids the tax even if you never left the UK to live overseas in the first place.You do not have to wait seven years to avoid the tax, which is the case under the potentially - exempt - transfer rules, and you do not have to give the assets away either.You and your spouse or partner can continue to benefit from the assets.

With all of the benefits a QNUPS provides the British expatriate, it is worth thinking about the location of assets and beneficiaries and ensure the topic is a“known known”when planning wealth issues.

Key points of QNUPS

• There is no maximum age at which you can invest in a QNUPS.
• You do not need to have any earned income from an employment in order to make a contribution.
• There is no maximum contribution that can be made into a QNUPS.
• The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.