This article explains our understanding of the taxation of the UK collective investments held by a Qualifying Non-UK Pension Scheme where the member is, or has become UK resident.
QNUPS – Taxation of UK collective investments held
Both the trustees and the member will individually need to ascertain any tax due and make any payment due to local tax authorities.
The starting point when considering what the taxation of a QNUPS holding direct investments is: What is a QNUPS, in UK tax terminology; it would be regarded as an offshore trust, with non-UK resident trustees. We will assume for this article that no employer contributions are being made and that the individual who has provided all the funds for the QNUPS is UK resident.
Settlor Interested trust
The first question we need to address with a QNUPS is whether it is 'settlor-interested' or not, as this will impact the tax treatment.
For a trust to be regarded as 'settlor interested' there are three instances where the settlor could be chargeable.
- The settlor keeps an interest in the trust or settlement;
- Trust income or capital is held for the benefit of the settlor’s minor child or step-children;
- The trustees pay a capital sum to the settlor.
It is our view that a QNUPS would be regarded as a 'settlor interested' trust and therefore the settlor is taxable on the income arising even if they do not actually receive it.
The trustees need to fund the UK resident member’s income tax liability because whilst the member is charged on income, it may of course not belong to the member. For discretionary trusts (which is generally the trust used for a QNUPS) the trust rate of 45% (tax year 2016/17) will apply.
Another consideration – transfer of assets abroad
If, the settlor-interested tax rules do not apply or tax cannot be collected, the transfer of assets abroad tax rules can apply. Income Tax Act 2007, s 721 provides that where:
- an individual makes a transfer of assets abroad, i.e. to offshore trustees; and
- while resident in the UK, he has power to enjoy that income, i.e. he or his spouse is a beneficiary under the trust or can receive loans from the trust,
the income will be taxed on him as it arises if it would be so chargeable had it been paid to him directly as a resident individual in the UK.
All deductions and reliefs are given to the individual as if he had actually received the income. If the deemed income is subsequently received, it is not assessed again. See www.hmrc.gov.uk/manuals/intmanual/intm600020.htm
Capital gains tax
The position for all offshore trusts created on or after 17 March 1998 is that in cases where:
- the trust is an offshore trust;
- the settlor has an interest under the offshore trust;
- the offshore trustees realise capital gains in a tax year which would be subject to UK capital gains tax if they were UK resident; and in the tax year in question, the settlor is UK domiciled and UK resident,
under TCGA 1992, s 86, the capital gains of the trustees will be taxed on the settlor as they arise.
For these purposes the settlor has ‘an interest’ in the settlement if the beneficiaries include any of the settlor, his spouse, child, grandchild, spouses of a child/grandchild or companies controlled by any of these people.
Pension Commencement Lump Sum & Benefit Payments
Any payment of benefits either lump sum or by way of income will, if collectives are sold, potentially cause a capital gains tax liability.
The income payments will also qualify as foreign pension income so only 90% of the value will be subject to income tax at the member’s marginal rate.
As the assets are held directly, when assets are bought and sold there may be a liability to capital gains tax