For those relocating to or living in Portugal, exploring tax efficient investment options is crucial as taxes can run relatively high. One option that has gained attention in Portugal is the Qualifying Non-UK Pension Schemes (QNUPS). In this article, we will delve into what QNUPS are and assess their potential role in a financial strategy.
QNUPS is this right for you?
By Portugal team
This article is published on: 4th September 2024
What is a QNUPS?
A QNUPS is a type of international pension plan designed for individuals based outside of the UK. Unlike the Qualifying Recognised Overseas Pension Scheme (QROPS), which is funded by transferring assets from an existing pension, QNUPS are established with personal funds, assets, or cash.
Interestingly, a QNUPS is not a specific scheme or structure per se; it a tax status deriving from UK inheritance tax legislation (IHT) introduced in 2010. The fact that QNUPS derives from IHT legislation hints at one of the key benefits of using this scheme.
Making contributions to the QNUPS
While registered pension schemes offer tax relief on contributions, QNUPS do not. However, QNUPS are not bound by the annual allowance restrictions that apply to tax-relieved pension schemes, such as the current £60,000 cap for the UK 2024/25 tax year.
Contributions can be made in cash or by transferring assets, although it’s essential to consider potential tax implications, such as capital gains tax when transferring property.
When contributions to a QNUPS are made with genuine pension planning in mind, they generally do not attract inheritance tax. However, if contributions cannot be justified as legitimate pension provision, the inheritance tax position can become uncertain.
Taking money out of a QNUPS
A QNUPS must broadly follow the same rules as UK-registered pension schemes, meaning that at some point, you will need to draw benefits from the scheme.
Most withdrawals must be taken as income, which is likely taxable in your country of residence. For Portuguese tax residents, this income is typically subject to local taxation unless you qualify for pre-April 2020 Non-Habitual Residence (NHR) status, under which pension income could be taxed at 0%.
It is crucial to note that QNUPS may not be tax efficient or appropriate in all cases, as from a tax perspective it breaks the cardinal rule – do not turn capital into income.
To fund a QNUPS you contribute capital (which has already been taxed), and any withdrawals are treated as income and taxed fully – even if you have made a loss within the pension.
Benefits of QNUPS
Inheritance tax (IHT) advantages
One of the significant benefits of QNUPS is the potential inheritance tax relief. If structured correctly, assets within a QNUPS may be excluded from your estate and therefore not subject to the 40% UK IHT charge upon death.
However, it is critical to emphasise that QNUPS must be established with genuine retirement intentions. If the primary motive appears to be inheritance tax avoidance, HMRC may challenge the arrangement.
Ongoing tax efficiency
Generally, funds within a QNUPS are not subject to capital gains tax or income tax. However, exceptions may arise, such as when income is generated from UK-based assets held within the QNUPS.
Income tax treatment in Portugal
In Portugal, pension income is typically taxed according to the scale rates of income tax.
Some individuals report income from QNUPS on an “85/15” basis which, strictly, is applicable to annuities. Under this method, 85% of the income is treated as a return of capital, with only the remaining 15% taxed as income.
However, this approach may not always be appropriate, and professional advice is recommended.
Flexible investment choice
A QNUPS offers a broader range of investment choices compared to traditional pensions, including assets like real estate, non-listed shares, and chattels. This flexibility can be appealing to those with diverse investment portfolios.
Ensuring compliance
The jurisdiction and structure of the QNUPS must meet specific requirements, aligning closely with the rules governing UK pension schemes, particularly in terms of benefit form and timing.
To safeguard against accusations of IHT avoidance or “deathbed planning”, careful consideration must be made not only in terms of the value of an estate placed into a QNUPS, but the underlying investments too. For example, while some may promote the ability to hold non-income-producing assets like fine wine collections, it is essential to consider how such investments will generate income for the mandated future withdrawals.
Summary
QNUPS can be a valuable component of a well-structured financial plan but they are not a one-size-fits-all solution. Unlike registered pension schemes, QNUPS do not offer tax relief on contributions or withdrawals, and their benefits are contingent on proper planning and compliance.
For those interested in QNUPS, consulting with a financial advisor familiar with both UK and Portuguese tax regulations is essential to ensure that this investment strategy aligns with your overall financial goals.