Saving inheritance tax with a QROPS pension
A major tax problem for expats is breaking the domicile chain when moving abroad as inheritance tax is based on your country of birth, not residence.
Switching your UK pension funds in to an offshore pension scheme has a major impact on inheritance tax (IHT).
IHT is charged at 40% on the value of any estate exceeding the current IHT threshold of £325,000 – and this is likely to remain so for some years as the government has indicated no IHT changes are likely in the life of this Parliament.
Expats with UK pension rights have the choice between two offshore pensions – the QROPS pension and a QNUPS pension.
The difference between the two is subtle – a QROPS pension will always be a QNUPS pension, but a QNUPS pension need not be a QROPS pension.
The basic difference is how fund trustees communicate with HM Revenue and Customs. A QNUPS can have a home in a jurisdiction that does not have a double taxation treaty with the UK and therefore has no reporting process, whereas a QROPS pension must be based in a jurisdiction with a double taxation treaty that insists the trustees have to report any scheme changes in the first five years of a QROPS pension.
The result is both schemes take your pension savings outside UK inheritance tax laws regardless of your domicile. – subject to some anti-avoidance rules.
Setting up the right scheme can ensure the pension saver can access an enhanced tax free lump sum of up 80% of the fund value, have pension benefits paid gross and free any remaining funds on death from IHT.
Working out cross-border IHT for expats is complicated – and a QROPS pension or QNUPS pension transfer adds another layer of complication.
UK domicile, generally based on the domicile of an individual’s father, determines IHT liability – but a QROPS pension or QNUPS can ‘live’ in it’s own tax jurisdiction, like the Isle of Man or Guernsey, while the pension holder can be resident in any other country except the UK.
Effective estate planning means looking at the implications of financial ties to each of these places of domicile and residence.
To make sure everyone benefits from the improved investment and tax benefits of an offshore pension, it’s imperative an experienced international tax adviser is involved in setting up the scheme from the start. Free independent QROPS advice can be found here at Expat Pension.org
We have a wealth of experience in successful UK pension transfers in to QROPS pension and QNUPS. Contact us for more information.