A transfer from a UK pension scheme must be to an overseas scheme that is approved by HMRC as a Qualifying Recognised Overseas Pension Scheme – or a QROPS for short. These arrangements have been in place since the major UK pension changes were introduced on 6 April 2006. There are many hundreds of such schemes registered now around the world including Australian APRA and SMSFs. The UK legislation in the form of the Finance Act 2004 and Statutory Instrument 2006/206 set out requirements for reporting, allowable overseas fund criteria, lump sums limits etc.
One aspect that was not covered was whether in some instances UK Inheritance Tax (IHT) applied on these QROPS funds held overseas. The Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010 was made to confirm that IHT does not apply. The regulation had a backdated operational date to 6th April 2006.
All QROPS can be taken to be QNUPS but not all QNUPS will be QROPS. As transfer monies must initially go to a QROPS this will be the format usually found in Australia. Basically, a non-UK tax resident of Australia can now be comfortable that QROPS transferred monies from a UK scheme will not be subject to UK IHT whether the death is before or after age 75.
You might be wondering then why there is so much attention to QNUPS in the UK? They can be used for wealthy UK tax residents to: create IHT shelters; bypass the restrictions on contributions and benefit limits; allow for in species transfers; and many other planning opportunities. I would expect to see these funds being created in the Isle of Man, Spain etc in increasing numbers unless there is a UK crack down on them.
Totally irrelevant for UK expats now they are Australian tax residents? Unfortunately no! Take (for example) the situation where an expat is forced to return to the UK to look after a sick or aging parent. If the monies had been left in a QROPS the reporting period and the restrictions on the level of lump sum payments starts again. If, after the 5 complete tax years, the monies had been transferred to a QNUPS from the QROPS then this would not apply. It is an area that could do with more research from the Australian perspective. However it is still likely to be far less relevant to the typical UK migrant to Australia than it's other planning uses for wealthy UK tax residents.
The NetActuary Team