As is usually the case with my blogs, a conversation with an Accountant on Friday, and two of his clients subsequently, has given birth to this latest post. We were discussing using QNUPS to complement and inject a positive new structure into existing arrangements. QNUPS are useful for Expats, but also UK residents alike. I shall explain.
Expats working and living abroad usually retain their UK Dom status - even if they think they don't, simply because they remain offshore into and beyond retirement. On death, HMRC will almost certainly want to tax their worldwide assets at 40%. It is happening now on a daily basis and sons and daughters all over the UK are still coming to terms with losing £400K in every £1Million left to them in a Will.
The only way Expats can address this is to establish their Domicile elsewhere during their lifetime, and this isn't easy at the best of times. It would involve severing all ties to the UK including Dental and Doctors records, bank accounts, property etc. If any links to the UK exist, HMRC can, if it wishes to do so, attack the estate and claim it is entitled to its rightful 40%.
You only need to look at the recent precedent case, that to be fair did drag on for a while, - "HMRC vs Gains-Cooper" to understand how serious HMRC are about this. More recently we saw a similar case - albeit a lot smaller, in Portugal, follow similar lines with a massive back pay of tax to the Exchequer.
Expats, and UK residents alike, can of course create Potentially Exempt Transfers (PETs), and give away assets anytime during their lifetime, to move them outside of their estate. IHT is not levied against assets gifted at least seven years before death hence the PET period. If death were to occur within the seven years the IHT is tapered at 80/60/40/20 %, thus savings can still be secured. We can insure the tapered liability with Gift Inter Vivos Cover. Basically a life policy.
The problems with gifting assets revolve around a total post gifting lack of control. If beneficences fall into personal difficulties like for example, debt or divorce or dependency problems with drink or drugs the estate is potentially doomed. I have posted a separate video blog on the '4 fateful D's' entitled Gifting. We also have the problem of gifting assets and then continuing to enjoy the benefits from them.
HMRC will, or rather might - again if it wishes to do so, cite the assets fall into Gifts with a Reservation of Benefit (GROB) rules, and levy IHT against them anyway on death. So it can be pointless. No control. No benefit. And all that risk. Utter madness. In my opinion.
So, you might ask - What can be done? Well you could just give the assets away but then accept that Children may deplete the value, or set up a business that fails, involving Official Receivers, experience personal debt problems, or marry the wrong person who departs with their 50%. There are the many potential pitfalls I refer to above and in my video, and indeed within some of my previous blogs.
Or, you could just leave everything in your estate and insure your IHT liability with Joint Life Second Death Whole Of Life Assurance (JL2D - WOL), and write the policy in Trust to your Children. To do so we would calculate the estimated IHT and make an application to an insurer to cover both lives for this amount, and realistically we would probably index link the cover too to keep pace with RPI. This can be very expensive. And the longer you leave it the more difficult it is to pass the insurers medical underwriting tests.
One other option, for UK Residents and Expats alike, would be to use an international retirement plan. I have already written about Expats using, or rather transferring, UK pensions to QROPS and this stands, but now allow me to introduce the younger sibling of QROPS - the Qualifying Non-UK Pension Scheme (QNUPS).
The QNUPS legislation, which also created the earlier QROPS, was tabled in 2004 and built upon the existing EU pensions directive designed to extend the EU principle of free movement of capital throughout Europe. The legislation was rubber stamped in 2006, but the QNUPS element could not be used until HMRC passed further regulations in 2010.
A QNUPS can invest in a far wider range of assets compared to UK pensions. A QNUPS can invest into the same assets as UK Pensions including SIPP and SSAS alternatives, but also for example residential property. The fund can also be used to make loans to the members to embark upon other investment strategies that could include development opportunities. Due to the fund being offshore gross roll up with be applied on all growth.
This more flexible fund can therefore grow in a tax efficient environment and will not be restricted to the current lifetime allowance of £1.25M that UK pensions are capped at. And don't forget if you exceed this limit you will be hit with a 55% overfunding charge. Not to mention further overfunding tax penalties if you contribute more than the annual allowance of £40K.
Whilst a QNUPS will not attract tax relief on contributions it does not have any annual or lifetime allowance restrictions making it a very useful solution for higher net worth individuals who wish to build larger retirement pots, that can ultimately deliver far greater income levels when they retire. Another advantage of QNUPS is that they are also exempt from UK IHT.
The current Government spun a really clever marketing exercise by claiming it had removed IHT on UK pension schemes, which to be fair it did, this in itself was accurate, but it then replaced this with a revised tax charge at the same level as the unauthorized payment and overfunding tax charges of 55%, and levies this before the pension fund benefits are paid out to beneficiaries on the members death. No such tax charges apply to QNUPS.
Like in other areas of financial planning abuse of QNUPS can take place. We would not set up a QNUPS to avoid UK IHT. HMRC could seek to attack the arrangement if it considered the sole reason it was used was to avoid IHT. We would use a QNUPS for many other reasons all linked to lifestyle financial planning and our file would be solely driven by a clients need to secure other benefits, some of which I have touched on above.
UK residents who will need higher levels of income in retirement should have both a QNUPS and a UK pension. If restricted to a fund value at £1.25M the most this could realistically yield safely without depleting capital at a rapid rate, is perhaps around £60000 per annum, clearly insufficient for many who have been used to far higher levels of income during their working lifetime.
£60000 a year might just about cover the families flights into Malaga, mooring fees and fuel for a modest 42ft motor cruiser birthed in Southern Spain, and dinner at Dani-Garcia once a week on a Saturday evening.
Instead; why not maximise all available tax relief by transferring the annual UK allowance of £40000 into a UK pension, and then transfer as much as you like of taxed income into a QNUPS. QNUPS exist because by law the UK Government was forced by the EU to allow capital, in this case it would be post UK taxed income, to be moved throughout Europe freely without restrictions. And the legislation is such that IHT cannot be levied on QNUPS.
It is what it is, and we play the cards we are dealt, so my advice is consider QNUPS in the right circumstances, as part of a wider balanced financial plan. What information we hold on file and the suitability behind our advice is key.
We would always make sure that the right client, was using a QNUPS, for the right reasons, and at the right time, to deliver benefits, that have nothing to do with saving IHT. If the law states that IHT can't be levied on QNUPS, as far as we are concerned that is a side issue and completely irrelevant - as far as our file is concerned.