What is QNUPS and Why It Concerns Property Investors

Before the General Election, the Labour Party promised it would not increase the three main taxes - National Insurance, Income Tax and VAT. So, property tax experts believe that the Labour Party, now in government, may increase the Inheritance Tax (IHT) and the Capital Gains Tax (CGT). Due to this speculation, property investors and experts are opting for an offshore scheme to protect their investments from a potential IHT liability. Let us have a look at what the situation actually is.

Will Labour Raise IHT and CGT Rates?

After achieving victory in the election and spending some time in office, it has been clear that there is a huge amount of work to be done by the government. In her speech to the Parliament, Chancellor Rachel Reeves announced that the government is in a £22 billion funding gap due to the previous government’s unfunded commitments. So, the government may look into raising rates for Inheritance Tax (IHT) and Capital Gains Tax (CGT).

Property tax experts believe that the government is planning to align the CGT rates with the current Income Tax rates. Currently, basic rate taxpayers pay a CGT of 18% and higher rate taxpayers pay a CGT of 24%. If CGT rates increase to align with Income Tax rates, the basic tax rate will be 20%, and the higher tax rate will be 40%.

Labour has promised to focus on the wealthy taxpayers and make sure that everyone pays their fair share of taxes. So, a rise in Inheritance Tax (IHT) rates can be most likely. Due to the state of the public finances, the Chancellor revealed in her speech, “not to act is not an option.”

What is QNUPS?

QNUPS is a Qualifying Non-UK Pension Scheme which is designed to keep your retirement savings safe from huge tax liabilities. The QNUPS scheme is not approved but recognised by HM Revenue and Customs (HMRC). The scheme being unapproved means that the tax authority does not provide the usual taxation benefits attached to approved pension schemes.

You can invest in residential or commercial property, shares, cars or any other assets both in the UK and overseas through the QNUPS scheme. Due to the scheme being unrecognised, there are very few limitations on what investments you can make. This is what makes it attractive to property investors.

Here are some added advantages of the QNUPS scheme:

• Both UK residents and non-UK residents can contribute to the scheme
• With QNUPS, people can acquire shares in a private trading company, so any profit or dividend repayments can directly benefit the pension fund
• No Capital Gains Tax applies on an increase in the value of the trust fund
• Income Tax is paid at a basic rate on returns, UK source loan interest, and rental income
• All other payments exempt from UK taxation
• You can invest in QNUPS even after you retire
• Due to the scheme being offshore, it is exempt from any Inheritance Tax (IHT)

How Are Property Investors Using QNUPS?

In a private event before the general election, a promoter of an accounting brand claimed how their clients were using QNUPS to save their fortunes from tens of millions of pounds of Inheritance Taxes. The promoter went on to claim that their client invested £30 million in QNUPS to protect it from IHT. The promoter shared with an undercover reporter about his client, saying, “That’s my kids’ money. So, let us protect it from IHT today.”

The Inheritance tax rate is 40% currently for any property or asset valued at over £325,000. Also, the Inheritance tax raises about £7.5 billion every year. So, considering the government’s desperate need for funding, IHT tax rates increasing or the government looking to clamp down on schemes such as QNUPS is highly likely.

Although QNUPS is a legal scheme, tax critics argue that it is a form of tax avoidance, and a scheme like this deprives the public of hundreds of thousands of pounds, which could be used to fund crucial services.

The Chancellor has not announced any tax rises or scheme clampdowns as of now. However, the autumn budget published on 30 October 2024 and the days to come will reveal these things.

Conclusion

As potential changes in tax policies loom, property investors are exploring offshore schemes like QNUPS to protect their assets from Inheritance Tax (IHT) and Capital Gains Tax (CGT). These schemes offer tax exemptions but also face criticism for potentially reducing public funds. The government's future actions will be crucial in determining the legality of these strategies. So, it is better to stay informed and seek expert advice. This can help investors navigate the changing financial landscape and protect their investments from tax risks.

However, please note that the strategy of QNUPS can be regarded as under the ambit of tax avoidance. Therefore, please consult with professionals.