A hint that the British government is reviewing inheritance provisions for pensions could have a wider ranging effect on Qualifying Recognised Overseas Pension Schemes (QROPS) and Qualifying Non-UK Pension Schemes (QNUPS).
The technical points are complicated, but are based on the fact that all QROPS are QNUPS, even though both are governed by different tax rules.
QNUPS were made exempt from British inheritance tax (IHT) a few years ago when HMRC passed regulations to bring their IHT status in line with QROPS and other pensions.
However, papers published with Chancellor George Osborne’s Budget 2014 speech and fact pack reveals the Treasury is about to consult on how QNUPS and onshore pensions can equalise their IHT treatment to “remove opportunities to avoid IHT”.
Effectively, the Treasury is looking at ways to unplug the loophole they inadvertently created by plugging another IHT loophole.
QNUPS tax advantage
One of the tax advantages of a QNUPS is that when the member dies, any unused funds are passed to the estate’s beneficiaries without any tax charge.
However, onshore retirement savers do not enjoy the same advantage, as their unused pension funds attract a tax charge of 55%.
The Treasury has indicated that the government believes the 55% tax charge is too high and creates an environment where retirement savers look for artificial ways to minimise the tax.
The move is expected to hit QNUPS more than QROPS because UK residents can invest in a QNUPS, but only expats and international workers with UK pension rights can open a QROPS.
That leaves a situation where two people can have an identical amount left in their pension funds when they die – with the onshore pension member’s estate facing a tax charge of 55% and that of the QNUPS member having nothing to pay.
Revenue source
QROPS are also exempt from IHT in Britain, but are an investment rather than an estate planning wrapper like a QNUPS.
The logical outcome of the consultation would be for the tax charges for unused onshore pension funds to be the same as those for a QNUPS.
However, this could remove a profitable revenue source for HMRC.
“We’re still thinking about the options and will put our ideas out for wider discussion as soon as we feel we have a reasonable proposition,” said a Treasury spokesman. “However, we have no deadlines or dates in mind at the moment.”
