Please note that specific regional or jurisdictional variations have not been explored
What is a Qualifying Non-UK Pension Scheme?
A Qualifying Non-UK Pension Scheme (QNUPS) is not a product or a pension
scheme but the name of the regulations that must be met in order for an overseas
pension scheme to be exempt from UK inheritance tax (IHT). Overseas pension
schemes that meet the definition of a QNUPS within the QNUPS Regulations - the
Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 [SI
2010/0051] - will not be subject to UK IHT unless there is evidence of deliberate tax
QNUPS has become market terminology used generally to describe an overseas
pension scheme that meets the QNUPS regulations but is not a Qualifying
Recognised Overseas Pension Scheme (QROPS).
A QROPS will always meet the QNUPS definition; however, in this article we intend to
focus on overseas pension schemes other than QROPS, which meet the QNUPS
definition. Throughout this article we will refer to these schemes collectively as
Which overseas pension schemes meet the QNUPS definition in the QNUPS
The definition of a QNUPS is broadly that the scheme must either:
- be an overseas occupational pension scheme set up by an international
organisation that meets the definition of International Organisation in the UK
International Organisations Act 1968 Section 1(a). This is an organisation of
which United Kingdom, or UK Government are members; or
2. meet the regulations to be an OPS. In order for a scheme to meet the OPS
regulations, it must meet the following criteria:
– The scheme must be open to residents in the country or territory in which the
scheme is established and either:
– be regulated as a pension scheme in the country it is established, or
– if no such regulated body exists the following conditions need to be met:
(a) the scheme is established in another Member State of the European Union,
Norway, Iceland or Liechtenstein; or
(b) the scheme rules provide that at least 70% of a member’s relevant scheme
funds must be used to provide the individual member with an income for life and
pension benefits cannot be payable earlier than the normal minimum pension
age (currently 55) (unless in ill health).
– In addition, the scheme must also be recognised for tax purposes under the
country or territory which it is established. The country or territory where the
scheme is established must have a system of taxation for personal income under
which tax relief is available in respect of pensions and either:
(a) tax relief (which includes exemption from tax) is not available to the member
on contributions made to the scheme by the member, or their employer in respect
of earnings to which benefits under a scheme relate; or
(b) the scheme is liable to taxation on its income and gains and is an Australian
superannuation scheme complying with Australian income tax law; or
(c) all or most of the benefits paid by the scheme to members who are not
seriously ill are subject to taxation.
How are QNUPS structured?
The local jurisdiction will set out how local pension schemes are structured, however
many schemes follow a similar structure:
There is a master trust set up which appoints a corporate trustee (the QNUPS
provider) and their powers, roles and responsibilities in terms of administering the
- The trustee must be based outside the UK for the scheme to be considered as a
- There are usually wide investment powers allowing flexibility for the trustee to
invest in a wide range of assets – for example cash, bond, property, hedge, equity
and commodity funds.
- The trustee of the QNUPS holds these investments on the member’s behalf and
has investment powers.
- They will often appoint an Investment Manager to switch investments on their
behalf as market conditions change.
- The trustee would also be responsible for making payments of benefits from the
QNUPS to the member.
Are there any HM Revenue and Customs (HMRC) reporting requirements placed on
the QNUPS provider?
No. QNUPS providers have no obligation to submit information to HMRC. However,
these providers may have to meet local tax reporting requirements depending on the
local jurisdictional rules.
Transferring into a QNUPS
Can an individual transfer UK pension rights into QNUPS?
They can be transferred either before the individual commences benefits or once they
have come into payment, however, the transfer would be considered an unauthorised
payment for UK tax purposes and an unauthorised payment charge of up to 55% of
the transfer value would be made. Therefore, this is generally not a recommended
course of action.
Can an individual transfer non-UK tax-relieved pension benefits into QNUPS?
Yes, subject to the rules and eligibility requirements of the QNUPS provider. This can
allow for consolidation of the individual’s overseas pension scheme funds.
Consideration should be given to any tax consequences locally of transferring the
pension benefits before proceeding with the transfer.
Contributing to and maintaining a QNUPS
Whilst the member is a non-UK tax resident, can the QNUPS receive funding from
the individual or employer?
Yes, subject to the rules of the QNUPS provider and any regulation in the jurisdiction
in which they reside. These contributions are unlikely to qualify for any form of
Why does a QNUPS qualify for IHT exemption?
QNUPS used to qualify for UK IHT exemption before A-day (6 April 2006). The
pension simplification legislation contained within the Finance Act 2004 and
subsequent statutory instrument The Pension Schemes (Categories of Country and
Requirements for Overseas Pension Schemes and Recognised Overseas Pension
Schemes) Regulations 2006 (SI2006/206), removed the UK IHT exemption due to the
way the legislation had been drafted. The Inheritance Tax (Qualifying Non-UK
Pension Schemes) Regulations 2010 [SI 2010/0051] simply restored that UK IHT
exemption for these schemes and defined the schemes collectively as QNUPS.
Will a QNUPS always be IHT exempt?
Clearly, HMRC would challenge an abuse and therefore it is essential that an
arrangement that meets the QNUPS definition be regarded as a pension
There are no specific limits detailed in legislation, however contribution levels may be
prescribed in local pension law for the jurisdiction in which the QNUPS is
established, and if broadly similar to UK pension rules, are likely to be considered
reasonable. Another factor that HMRC are likely to consider when assessing
transactions on the scheme for tax avoidance is whether the payment of the
contributions to the QNUPS affected the individual’s standard of living.
What are examples that HMRC are likely to consider reasonable?
Although this is ultimately for HMRC to determine, the following examples provide
some guidance on what may be deemed acceptable as contributions to a QNUPS.
These are purely provided for guidance and ultimately any values may be challenged
by HMRC; especially where the sole purpose of the contribution is to avoid an IHT
Mrs Adams is aged 55, she is non-UK resident. She has wealth of over $1 million
and would like to make a lump sum contribution of $150,000 into her existing
QNUPS. The QNUPS currently has a value of $250,000. The contribution will come
from the proceeds of the sale of a rental property. This does not affect her standard of
Mr Collins is aged 57, he is UK resident. His estate is worth £1 million. He recently
inherited a sum of £200,000 from the estate of his deceased father. He wants to
make a payment of his £200,000 inheritance into his existing QNUPS, currently worth
£300,000. This does not affect his standard of living.
Mr Jones is aged 48, he is non-UK resident. He is employed overseas but there are
no pensions provided in the country where he resides. His employer is happy to
contribute to a pension scheme for him and suggests monthly contributions into a
Guernsey QNUPS representing 15% of his salary each year. This does not affect Mr
Jones’s standard of living.
What are examples that HMRC are not likely to consider reasonable?
All the following examples already have existing QNUPS arrangements in place. We
will assume these all have a current value of $250,000
Mrs Harvey is aged 70 and has been retired for 20 years. She has UK assets worth a
total of £5 million. She has been told if she transfers money into her QNUPS, it will
immediately be outside of her estate for IHT purposes. She wants to transfer £1
million into her QNUPS and she wishes to take benefits straight away.
Mrs Jacks has been diagnosed with terminal cancer and has been told she has 6
weeks to live. She receives an income of £100,000. She rents property but holds
investments valued at £500,000. She wants to transfer a large portion of this into a
What if the member of the QNUPS returns to the UK or is UK resident?
If the member is UK resident or returns to the UK, it would be possible for the
member to make additional contributions (assuming the scheme rules of the
QNUPS allowed this). The contributions made in the UK would not however qualify for
UK tax relief.
If the underlying investment of a QNUPS is a highly personalised portfolio bond,
would deemed gains apply?
The member is likely to be regarded as the person who “created” the settlement
under section 465 ITTOIA 2005 as they are providing ongoing contributions to the
However, section 366 ITTOIA 2005 will prevent a double tax charge arising where
there is also a tax charge to section 575 ITEPA 2003. This will only apply where
foreign pension income is being taken and therefore this will not prevent a “deemed
Members should utilise an offshore bond that is not a highly personalised portfolio
bond if they are UK resident or request the insurer to endorse their Bond if they are
returning to the UK. See our article: Personal Portfolio Bond taxation for further
Will the value of the pension fund paid to beneficiaries on the member’s death be
included in the member’s estate for UK IHT?
No. The UK pension rules governing QNUPS allow for the benefits payable under
such schemes to be exempt from UK IHT.
No Member Payment Charge will apply as the funds are not UK tax relieved funds.
When could a QNUPS provider change other than when the member requests a
transfer to another QNUPS provider?
A QNUPS provider will only change where the corporate trustee has ceased trading.
In this situation, a suitable replacement trustee would need to be appointed for the
QNUPS in the short term and the scheme member could choose to transfer to
another QNUPS provider.
Taking benefits from the QNUPS
Does the scheme benefit from the UK pension-fund taxation advantages on any
income and growth?
No. The assets within the QNUPS will be subject to the rules of the relevant tax
authority in the country or territory in which the assets are situated.
For example, if a member of a Guernsey based QNUPS has their funds invested into
an Isle of Man offshore investment bond, then the funds will be subject to Isle of Man
fund taxation. Currently, there is no taxation in the Isle of Man of funds held within an
offshore investment bond (other than withholding taxes on the underlying assets).
How is QNUPS income taxed in the UK?
Any income taken will be taxable under section 575 ITEPA 2003 – as foreign pension
income. This means 90% of the income will be chargeable to tax at the member’s
For example, monthly income of £10,000 is received, 90% of this, £9,000 will be
chargeable at the members highest rate of tax.
Depending upon where the QNUPS is invested, there may be further taxation relating
to the underlying investment when realising the funds to provide the pension benefit.
How is a lump sum payment from a QNUPS taxed in the UK?
When considering UK legislation there does not appear to be a specific legislative
basis for taxing with Pension Commencement Lump Sums or Lump sums on death
of the member.
However, depending on the underlying investment vehicle a charge to tax may arise
on the underlying investment.
If the underlying asset was an offshore bond, how is this taxed?
In summary, unless a UK employer has contributed to a QNUPS, the member will be
deemed the settlor of the QNUPS and therefore will be liable for chargeable events
unless the amount would be taxed as pension income. This would be taxed at the
settlor’s marginal rate of income tax (up to 45%).
Where foreign tax applies to the income as well as UK income tax on the chargeable
event gain, then if a double taxation agreement exists, it may be possible for the
member to claim some tax relief.
It is also possible for chargeable gains made under the chargeable events regime, to
be reduced by amounts taxed for UK income tax or corporation tax other than the
chargeable events legislation to avoid a double taxation charge.
Where a UK employer has contributed to the QNUPS, pension benefits will be taxed
under the disguised remuneration tax rules and therefore the benefits will be exempt
for chargeable event purposes.