Budget 2024: IHT pensions and the end for QNUPS?
Andy Wood • October 31, 2024
IHT pensions and the end for QNUPS?
Could we get any sleepier than IHT and pensions.
You're forgetting, this is the Rachel Reeves rock and roll budget.
Brace yourselves.
Current Tax Position on Death
Other than in the case of non-discretionary pension schemes, the benefits in a pension scheme escape IHT on death.
However, that is not the full picture.
Generally speaking, the surplus value in a pension scheme may be subject to income tax in the hands of the recipient, depending on whether the member has reached the age of 75 or not.
If the member dies before the age of 75, then the death benefits are usually paid free of tax (though this is a simplified answer).
Death benefits paid when the individual dies age 75 or over are taxed at the recipient’s marginal rate of income tax.
New Proposals
In the Budget, we were told that unused pension funds and death benefits payable from a pension will be added to a person’s estate for Inheritance Tax purposes.
This will take effect from 6 April 2027.
It will be down to pension scheme administrators to report and pay any IHT due.
As such, it seems to be the intention that, where the pensioner is over the age of 75, that the surplus pension fund could be subject to 40% IHT on death. If, say, a child or grandchild receives benefits then the beneficiary will also be subject to tax at a rate of up to 45% on those receipts.
This means that the funds could be subject to an overall rate of 67%!
Of course, the pension is likely to have benefited from tax relief on contributions going in and tax-free investment growth (generally).
But, all the same, seems a bit stingy, Rachel.
What about QNUPS?
I’ve not seen much about QNUPS in the comments I’ve seen elsewhere. However, it is abundantly clear that the IHT changes will also apply to QNUPS.
The Consultation Doc on this aspect states the following:
“1.13. While the relevant changes will apply equally to UK registered schemes and QNUPS, any references to pension schemes in this consultation document should be taken as referring to UK registered pension schemes administered by PSAs. We recognise that QNUPS have a different administrative structure to UK registered schemes, and stakeholders are welcome provide any views on how these changes should be implemented for QNUPS (see Question 8 below). “
This is perhaps not a surprise bearing in mind the number of people marketing QNUPS as IHT saving vehicles.
But those days appear to be over.
That’s a shame.
Conclusion
Where pensions and QNUPs might have been sold on the basis of their IHT efficiency in the past, this will not be the case from the new rules taking effect in April 2027.
For over two centuries, the UK’s non-domiciled tax regime and its remittance basis has been a cornerstone of tax planning for wealthy expats and international families. It was introduced, along with income tax, by Willian Pitt the Younger at the very end of the 18th century. It was part of the fiscal firepower necessary to battle Napoleon Bonaparte. And, like income tax, it had pretty much been a constant feature of the UK’s system ever since. But in March 2024, the then Chancellor, Jeremy Hunt, rang the death knell for the remittance basis, with Labour’s Rachel Reeves – who would succeed Hunt a few months later - declaring she would have abolished it anyway. The end is therefore very much nigh for the UK’s non-dom tax regime. More specifically, the end is 6 April 2025. However, out with the old and in with the new’ goes the saying. As such, the ‘what comes next’ will reshape the tax landscape for non-doms, expats, and international investors with a UK footprint (or those considering creating one). What is Domicile (and Non-Domicile)? Domicile is not a straightforward concept like tax residence. The latter is largely about physical presence (or otherwise) in a particular. Instead, as well as physical presence, it also requires an understanding of your future intentions. Is a place somewhere that you intend to live permanently or indefinitely. There are two main types of domicile that I will discuss here: • Domicile of origin: This is inherited at birth, usually from your father (if you think that is misogynistic then I don’t make the rules, OK?). You do not lose your domicile of origin. However, think of it as the foundations of a building. You can a domicile of choice on top it. • Domicile of choice: You build a new domicile of choice by achieving two things. Firstly, by physically residing in place and, secondly, by forming the intention to stay in that same place permanently or indefinitely. Both must be present.
So you’ve left the UK for pastures new. The sun is shining. You're making more money. You’re enjoying a great quality of life in a new country. In fact, you’re totally de-mob happy. Even better, as a non-UK resident, UK taxes are a dim and distant unpleasant memory, right. Right? Wrong. I don’t necessarily see my role in life as chief balloon popper. However, there are some Uk tax things you should bear in mind before declaring yourself a tax exile. Am I really non-UK Resident (“NR”)? Up until 2013, the UK didn’t really have a statutory definition of residence for tax purposes. Yes, that’s as crazy as it sounds. Fortunately, the Statutory Residence Test (“SRT”) was introduced from 2013. The idea is that it provides a degree of objectivity through a series of tests. Although a statutory test, other than in straightforward cases, it can still remain complex.
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