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QNUPS: A Retirement Savings Plan with Inheritance Tax Planning Benefits for UK Domiciled Individuals that are Tax Resident in Portugal or Spain. Image

QNUPS: A Retirement Savings Plan with Inheritance Tax Planning Benefits for UK Domiciled Individuals that are Tax Resident in Portugal or Spain.

April 13, 2022

Everything You Need To Know About The Tax Benefits of QNUPS.


If you’re contemplating retirement in the sunny surrounds of Spain or Portugal then your pension assets will be your biggest financial priority. However, there are scenarios that may trigger re-evaluation of your retirement planning. Perhaps you’ve already reached your annual or lifetime allowance on your UK pension but wish to make further provisions to boost income streams for retirement.


As well as this, the issue of UK Inheritance Tax must also be considered even if you have already established residency in Portugal or Spain. Losing a UK domicile of origin and acquiring a domicile of choice in another country is notoriously difficult, which may mean your estate is subject to UK Inheritance Tax despite living overseas for years or even decades. Or perhaps you intend to return to the UK in your later years but still want a plan in place for your pension assets that minimises exposure to IHT.


A QNUPS offers a possible solution to all of these problems, but what do you need to know?


Introduced by HMRC in 2010, a QNUPS (Qualifying Non-UK Pension Scheme) is a regulated overseas pension scheme that offers an array of flexible investment and tax planning benefits including capital gains tax free growth of your assets.


Diverse investment options


There are no limits to the contributions you can make to a QNUPS (although these should be reasonable in relation to overall wealth) nor subject to lifetime limits on the size of the fund. Because of this it makes an attractive option for those who still have investable wealth outside their existing pension arrangement, and are looking for something that could potentially provide greater returns than a traditional pension scheme where investments are more restricted and funds are limited. QNUPS are also not subject to capital gains tax, so your fund will be able to grow undisturbed.


UK Inheritance tax and QNUPS


One of the biggest advantages of a QNUPS is the opportunities it offers for inheritance planning, specifically in shielding your assets from UK Inheritance Tax and mitigating IHT liability for your heirs. As it is an offshore pension scheme, any contributions paid into a QNUPS will not be subject to IHT regardless of whether you retain UK domicile status or return to the UK at a later date.


Expat retirees with pensions in Portugal and Spain


What are the benefits of a QNUPS for UK residents in Spain and Portugal? In both countries, beneficiaries of a QNUPS can receive a preferential tax rate if income benefits are properly structured. This takes the form of a temporary annuity where a fixed sum of income is specified for periods of three, five or 10 years. If the pension trustee can issue confirmation that the income is paid as a temporary annuity then only a proportion of the income received is subject to income tax in both Spain and Portugal.


Tax rates differs between the two countries. In Spain your tax liability is dependent on the length of the annuity – in a five-year term, for example, only 12% of income is taxable, and your effective tax rate would range from 2.22% to 5.544% dependent on your income for the tax year.


In Portugal, only 15% of income can be taxed, or a flat rate of 10% if you have Non-Habitual Residency (NHR) status. For the latter, this means an effective tax rate of just 1.5%. After the 10-year NHR period ends the effective tax rate ranges from 2.175% to 7.2% dependent upon income.


It’s clear, then, that a QNUPS can offer highly attractive tax rates for those with expat pensions living in Spain or Portugal, but does the same also apply for the beneficiaries of your pension after you die?


Succession Tax and QNUPS Pensions in Spain and Portugal


Death benefits from a QNUPs also have a reduced tax burden. Whereas in the UK if you die over the age of 75 any death benefit lump sum payments from your pension fund to your beneficiaries would be subject to tax, the equivalent from a QNUPS is treated more generously in Spain and Portugal.


In Portugal, a lump sum death benefit from a QNUPS is payable tax-free to a beneficiary even if the deceased holder was over 75. Furthermore, no inheritance tax is due if beneficiaries are direct family members (such as a spouse or children).


In Spain, taxes on death benefits are dependent on the region you live in. For example, in Retirement Plannng Andalucia, if your assets are under €1,000,000 and your beneficiaries are direct family members then no taxes are payable. If your assets exceed €1,000,000 then a 1% succession tax must be paid on whatever exceeds this threshold.


However, as a QNUPS is an overseas scheme, if your beneficiaries live outside of Spain then no succession tax is due regardless of the size of your pension assets.


Rules to consider


It’s also worth bearing in mind that while almost anyone is eligible to invest in a QNUPS there are qualifying criteria. It must be located in a country or territory that regulates pension schemes, and be recognised there for tax purposes. It can only provide benefits to members of retirement age, and it must be open to residents and non-residents where it is located. A QNUPS should be set up as a genuine retirement scheme, with reasonable contributions in line with the recipient’s circumstances (such as age, wealth, and income requirements).


Important To Seek Retirement Planning Advice


It is important, then, to consider this option carefully and seek expert tax planning advice from trusted financial advisors in Spain and Portugal to ensure this is the right choice for you.


 Call us today on +44 207 998 0570 or e-mail enquiries@fwm.gi to book your free consultation. 


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