Facts and analysis
What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?
A QROPS is an overseas pension scheme which meets prescribed HM Revenue & Customs (HMRC) conditions1. In summary, these conditions include:
- The scheme must be established in a country or territory outside the UK which has a double taxation agreement in place with the UK.
- The scheme must be recognised for tax purposes and regulated by the relevant authorities of the country in which it is established, or be established by certain international organisations for its employees.
- Benefits should not start payment until the member has reached the normal minimum pension age applicable in the UK (currently 55), unless benefits are taken under the scheme’s ill health rule.
- A QROPS scheme manager will need to notify HMRC that their scheme meets the prescribed QROPS conditions. The scheme manager must also undertake to comply with the HMRC reporting and administration requirements for transferred UK pension funds, and inform HMRC if the scheme ceases to meet the QROPS conditions in the future. Once this declaration from the scheme manager has been received by HMRC they will acknowledge the scheme’s QROPS status and allocate a unique QROPS reference number.
- When registering the scheme’s QROPS status with HMRC, the scheme manager is required to confirm that they will use pension funds which have benefited from the tax concessions available to UK registered pension schemes to provide retirement benefits which are roughly similar to those which would have been available from a UK registered pension scheme.
- A QROPS is able to accept a transfer of UK pension funds as a ‘recognised’ transfer and the member will not incur unauthorised payment charges when their pension funds transfer away from the UK pension regime. To avoid unintentionally making an unauthorised payment, the transferring UK scheme will usually request evidence to confirm that the intended receiving scheme is a QROPS, before the pension funds are transferred.
- The member will need to meet the eligibility criteria specified by their QROPS, this may include restrictions imposed by the tax or regulatory authorities of the country in which the scheme is established.
- The member may also need to pay a 25% overseas transfer charge on the transfer value.
Transferring a UK pension fund to a QROPS
A transfer of pension funds from a UK registered pension scheme to a QROPS is permitted by HMRC as a ‘recognised’ transfer. The transfer will be a Benefit Crystallisation Event (BCE8), with a lifetime allowance declaration required from the member before the funds may be released by the UK scheme. If the transfer exceeds the member’s available lifetime allowance, a tax charge of 25% will apply to the excess before the funds are transferred. This tax charge will apply regardless of where your client is resident at that time.
- Although an overseas scheme may hold QROPS status, this is relevant for HMRC purposes only and does not mean receipt of a transfer from a UK pension scheme is acceptable to the overseas tax authorities.
- The intended receiving QROPS scheme must be able to accept pension funds transferred directly from a UK pension scheme under the legislation of the country in which it is established, and
- The member will need to meet any residency, employment or income requirements for membership of the receiving scheme.
- As the transferred pension fund will have benefited from UK tax relief when the contributions were paid, and also while held in the UK pension fund, a QROPS is required to report to HMRC when these funds start to provide benefits to the member or are transferred away from the QROPS.
- Although an overseas scheme may appear on the ROPS list HMRC cannot guarantee these are ROPS or that any transfers to them will be free of UK tax. It’s your client’s responsibility to find out if they have to pay tax on any transfer of pension savings.
Overseas transfer charge
The UK budget of 8 March 2017 changed the rules relating to transfers from UK registered pension schemes to a QROPS.
For some transfers to a QROPS a 25% overseas transfer tax charge has been introduced which the UK scheme is responsible for deducting, reporting and paying to HMRC before making the transfer payment. Even where the tax charge doesn’t apply on the initial transfer there are circumstances where it can apply at any point in time before the end of the fifth complete tax year following the transfer. Similarly, where it applies to the initial transfer it may be able to be reclaimed at any point in time before the end of the fifth complete tax year following the transfer should the client’s circumstances change.
Further guidance on this can be found on gov.uk
HMRC reporting is required to ensure that UK tax relieved savings held in a QROPS are used to provide the pension scheme member with retirement benefits which are roughly similar to those available from a UK registered pension scheme.
- A QROPS scheme manager will need to notify HMRC when benefits are paid from former UK pension funds, or if the former UK funds are transferred to another overseas pension scheme, if the payment or transfer takes place within 10 years of the original transfer of UK pension funds.
- If a payment or transfer from a QROPS is paid 10 years, or more, after the original transfer, the QROPS scheme manager will only need to notify HMRC if the member is:
- resident in the UK when the payment or transfer is made (or treated as made) by the QROPS, or
- although not resident at that time, has been resident in the UK earlier in the tax year in which the payment or transfer is made (or treated as made) by the QROPS, or in any of the five tax years immediately preceding that tax year.
Member payment charges
- If a QROPS makes payments from former UK funds which would not have been permitted under a UK scheme e.g. a transfer to another overseas pension scheme which is not recognised by HMRC as a QROPS, or payment of an excess lump sum, this will be a ‘member chargeable payment’.
- The member tax charges are the same level as the unauthorised payment tax charge (40%) and surcharge (15%). These would be levied on the member regardless of where they are resident at the time the payment or transfer is made.
- In addition to tax charges for the member, the overseas scheme may lose its QROPS status, preventing acceptance of any further UK pension fund transfers.
What is a Qualifying Non UK Pension Scheme (QNUPS)?
QNUPS were introduced in February 20102 when legislation passed at that time3 allowed assets held in certain types of overseas pension scheme to be subject to the same IHT exemption as UK registered pension schemes. This exemption is backdated to 6 April 2006 and means QNUPS may be exempt from UK IHT 10 yearly and exit charges for a period of up to two years following the member’s death.
However, unlike a QROPS, the scheme need not be established in a country or territory which has a double taxation agreement with the UK. This potentially means a QNUPS may be available in a wider range of countries than QROPS schemes.
QNUPS are similar to a QROPS (and all QROPS will also meet the QNUPS criteria), however, they do not need to notify or register with HMRC, and do not need to comply with any HMRC reporting requirements.
There are a few significant differences which may impact on a QNUPS’ suitability for your client:
- A QNUPS must be established overseas and both recognised for tax purposes and regulated by the relevant authorities of the country in which it is established, or be established by certain international organisations.
As with QROPS, where there is no tax or regulatory authority, or the scheme is established by an international organisation, the scheme rules must provide for:
- at least 70% of the members scheme funds to be used to provide an income for life, and
- pension benefits should not start payment until the member has reached the normal minimum pension age applicable in the UK (currently 55), unless benefits are taken under the scheme’s ill health rule.
- A QNUPS scheme manager does not need to comply with the HMRC reporting and administration requirements for former UK pension funds applicable to QROPS. This means the scheme does not need to confirm to HMRC that payments made by the scheme are similar to those which would have been available under a UK pension scheme.
As a result, transfers of UK pension funds to a QNUPS (which does not also meet the QROPS requirements), are not ‘recognised’ by HMRC and will be an unauthorised member payment.
So . . . why recommend a QNUPS?
QNUPS are available to clients seeking to build up a pension fund without being restricted by the HMRC limits and regulations. For example, a high net worth client who has already maximised the tax advantages available under the UK pension regime or who wishes to build up a pension fund with a wider range of investments, including residential property.
Although a QNUPS cannot accept a transfer of UK pension funds, a QNUPS may provide valuable IHT planning opportunities for your UK domiciled clients (whether UK resident or not).
The following outlines some of the additional flexibility which may be available under a QNUPS. Bear in mind that the options offered by different schemes will vary, as will the requirements of overseas tax authorities or regulators.
- Investment range
The range of investments permitted by a QNUPS is generally wider than a UK pension scheme, and may include residential property, or fine wines and antiques, which cannot usually be held in a UK registered pension scheme.
Loans from a pension scheme to a scheme member are prohibited under the UK pension regime, although in certain circumstances a loan may be available to a sponsoring employer or unconnected third party. This also means a QROPS cannot make a loan to the member from transferred UK pension funds.
As a QNUPS does not fall under the UK regime, this restriction on loans to the member does not apply. Depending on the QNUPS rules and the flexibility permitted by the overseas tax authorities or regulator, a member may be permitted to take a loan from their pension fund.
- UK registered pension schemes / QNUPS comparison
UK registered pension schemes
As contributions to a UK registered pension scheme attract tax relief, there is a limit on the maximum value of tax-relievable contributions which may be paid each tax year.
Member contributions above £3,600 each tax year must be supported by relevant UK earnings and, if total contributions exceed the annual allowance (including any carry forward of unused annual allowance), an annual allowance tax charge will normally apply, offsetting the benefit of any tax relief on the excess contributions.
There is no UK tax relief available on contributions paid to a QNUPS and the UK contribution limits do not apply. This means clients who wish to contribute more than their relevant UK earnings or available annual allowance may consider contributions to a QNUPS as an alternative to other savings and investment vehicles.
This opportunity may be of benefit to those high income clients who have been impacted by the substantial reduction in both the annual allowance and lifetime allowance, or who are unable to continue with tax-relievable UK pension savings under the enhanced or fixed protection rules.
Under the UK pension regime, tax-relievable contributions to a registered pension scheme must cease when the member reaches age 75.
The age 75 restriction does not apply to a QNUPS and contributions can continue beyond age 75 (subject to the QNUPS terms and conditions).
Although no UK tax relief is available on any contributions paid to a QNUPS, the ability to contribute in later years may benefit those individuals who have little or no pension savings in place as they approach retirement age, or who wish to combine their retirement and inheritance planning.
Funds available to support contributions
Member contributions to a UK registered pension scheme attract UK tax relief at the member’s highest marginal rate (subject to annual allowance restrictions). As a result these contributions need to be supported by the member’s relevant UK earnings.
UK tax relief is not available on any contributions to a QNUPS and these payments may be made from other sources of income, in addition to relevant UK earnings.
This flexibility may be of benefit to clients with a substantial level of unearned income e.g. those with significant rental or investment incomes, or those wishing to increase their pension provision after they have ceased employment.
Before considering investment in a QNUPS, your clients will need to review the tax implications of any decisions they make. It is recommended that your client seeks tax advice both in the UK and overseas to avoid any unexpected tax charges.
No UK tax reliefs or exemptions apply to contributions paid to a QNUPS.
This means a QNUPS is not an efficient means of reducing exposure to UK income tax. Your clients may wish to maximise their tax reliefs under the UK pension regime and consider other UK tax efficient investments e.g. ISAs, in addition to building up a pension fund in a QNUPS.
The lifetime allowance limits do not apply to retirement benefits paid by QNUPS. If UK pension funds have transferred to a QNUPS (which also meets the QROPS requirements), a lifetime allowance declaration will have been made by the individual before the funds transferred from the UK pension regime. A further lifetime allowance declaration is not required when the benefits are put into payment.
Taxation of pension benefits will normally depend on the individual’s personal circumstances and their country of residence at the time benefits are taken.
Taking benefits from an overseas pension scheme – UK residents
Where a foreign pension or lump sum is paid to a UK resident, 100% of the pension arising will be chargeable to UK tax (to the same extent as if they had been paid from a registered pension scheme).
The terms of a double taxation arrangement, between the UK and the country where an overseas pension scheme is based, can vary. In some cases, the UK resident individuals may not be subject to UK tax on their overseas retirement income. As a result of changes introduced by the Finance Act 2011, the presence of a double taxation arrangement will not necessarily prevent a UK tax charge on this overseas retirement income in future.
With effect from 6 April 2011, HMRC will be able to apply tax to pension income, or similar remuneration, paid from former UK pension funds held in an overseas pension scheme. To avoid duplication, any tax paid under the overseas tax regime will be credited against the UK charge.
This tax charge is to prevent individuals transferring their pension fund overseas with the primary intention of taking an income under a more lenient tax regime.
The legislation introducing QNUPS in February 2010 clarified the IHT position of pension funds held in certain overseas pension schemes, established under a discretionary trust, following the death of a UK domiciled member.
By HMRC concession, pension funds held in a QNUPS are subject to the same IHT exemption on the treatment of funds held in a discretionary trust as UK registered pension schemes. This means QNUPS are eligible for an exemption from UK IHT (10-yearly and exit charges) where the scheme assets are distributed within two years from the date the scheme was notified of the member’s death (or the scheme could reasonably be expected to have known that the member had died).
- A contribution to a QNUPS is treated in the same way for IHT purposes as a contribution to a UK registered pension scheme. If the member is in good health (and likely to survive to retirement) then there is no transfer of value (gift) for IHT purposes.
- As for UK pension schemes, the IHT exemption continues to apply if the member does not take their pension benefits as soon as they reach pension age. An ‘omission to act’ e.g. not exercising pension rights under a pension scheme when the member becomes entitled to do so, or opting for income drawdown instead of annuity purchase, will not usually trigger an IHT charge.
- Your client will need to bear in mind that an IHT tax charge may still apply if their decision to place funds in a QNUPS was made purely for IHT planning, and not retirement planning, purposes e.g. if their state of health at that time indicated that they may not survive to receive a retirement income from the QNUPS funds.
- This means a QNUPS may be a useful inheritance planning vehicle for your clients. Although your clients will also need to consider any tax rules on inheritance or succession which apply in the country where they are resident or where their overseas pension scheme is established.
- In a similar way to spousal bypass planning, a QNUPS may be a means of keeping funds outside the member’s estate for IHT purposes, although they will ultimately fall within the beneficiaries’ estate. This means the member’s beneficiaries may also need some IHT planning support.
UK Domicile and Residence
A QNUPS may be available to individuals who are either UK resident, or non-UK resident, as well as individuals resident in the country in which the scheme is established. Whether an individual may be liable to UK IHT will depend on whether they are UK domiciled at the time of their death.
- Bear in mind that domicile and residence are not the same, and an individual may only have one domicile at a time for IHT purposes. It is possible for an individual who has been non-UK resident for many years to still be UK domiciled for IHT purposes.
- If an individual is UK domiciled, has acquired UK domicile as their domicile of choice or is deemed domiciled in the UK, then UK IHT liability will apply to their world wide assets.
- If the individual is not UK domiciled then any IHT liability will be limited to their UK assets.
- As for registered pension schemes, placing assets into a QNUPS means they are not included in the IHT estate of a UK domiciled member. This means the IHT exemption for QNUPS may be of benefit for those individuals who have retained their UK domicile status.
1 Finance Act 2004, Section 150(7). 150(8) and Section 159, The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 (SI 2006 / 206), The Pension Schemes (Information Requirements – Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006 (SI 2006 / 208)
2 Inheritance Tax Act 1984, Section 271A, inserted by the Finance Act 2008
3 The Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 (SI 2010 No. 51)