Succession Planning and Tax Mitigation for British Expatriates: The Critical Interplay Between SIPPs, Foreign Pensions and Offshore Trusts

Overview

The decoupling of domicile for UK Inheritance Tax (IHT) liability has created new planning opportunities for British expatriates and their advisers.

Many British expatriates retain substantial UK situs assets – an estimated £650 billion in residential property and £66 billion in individual savings accounts (ISAs) alone without considering the value held in self-invested personal pensions (SIPPs) or other assets, such as share portfolios.

This creates exposure to various UK taxes, such as transfer taxes, capital gains tax (CGT) on disposals, income tax on UK source receipts, and IHT with various tax rates. Collectively, these can add up to an effective tax rate of 90% in some cases.

By migrating assets or economic exposure into tax-neutral jurisdictions, advisers can mitigate these charges and enhance the efficiency of both investment growth and wealth transfer for British expatriates given recent legislative changes. However, cross-border transactions must be carefully managed to avoid triggering unintended tax consequences or creating a less favourable position.

This bulletin examines strategies that utilise a QNUPS or an offshore trust for British expatriates who are UK non-resident, but who have UK situs assets, including SIPPs, and/or Beneficiaries who may be UK resident.

Executive Summary

The UK’s shift towards a residence-based IHT regime (effective from April 2025), combined with the preferential treatment of pension death benefits, presents timely planning opportunities:

This bulletin considers:

1. Making a Guernsey-Based QNUPS a Beneficiary of a SIPP.
2. Paying SIPP Death Benefits into an Offshore Trust.
3. Contributing UK situs assets to a QNUPS.
4. Internationalising UK situs assets and the use of offshore trusts.

Section 1: Dealing With SIPP Death Benefits

Option 1: Making a Guernsey-Based QNUPS a Beneficiary of a SIPP

Financial advisers often seek to channel SIPP death benefits into a Guernsey-based QNUPS. Below is an outline of the expected tax treatment and the structural considerations.

Can a Guernsey-Based QNUPS Be Named as a Beneficiary?

• Trustee discretion: SIPP trustees must retain full discretion over the destination of death benefits.
  
• Expression of wishes: The member may recommend payment into a Guernsey QNUPS, but this is not binding on the trustees.

UK Tax Treatment

• IHT: The payment falls outside the estate and there is no IHT on death benefits paid to a QNUPS.
  
• Income tax (death before or after 75 years of age): Provided the QNUPS and its member are UK non-resident, then no income tax is chargeable in the UK.
  
• Relevant property regime: Not applicable – the QNUPS remains a pension (no 10-year or exit charges).

The above provides a very efficient option where the deceased is non-UK resident.

Option 2: Paying SIPP Death Benefits into an Offshore Trust

• Discretionary status: Pension death benefits paid at the trustees’ discretion fall outside the member’s estate for UK IHT purposes.
  
• Relevant property trust regime: Once inside the trust, the funds may be subject to:
  
  • 10-year anniversary charges (up to 6% on amounts above the NRB).
    
  • Exit charges (up to 6% on distributions).
    
• Nil rate band (NRB): The trust benefits from the deceased’s unused NRB (£325,000) at the time of death.

UK Income Tax on a Lump Sum Payment into an Offshore Trust

• Member died before age 75: If the trustees pay a lump sum into an offshore trust within two years, there is no UK income tax liability.
  
• Member died age 75 or over: A lump sum death benefit is subject to UK income tax at 45% (emergency rate), unless the offshore trust qualifies as UK nonresident.

Criteria for UK Non-Resident Status

Trust residence: The trust must be managed and controlled wholly outside the UK.

• Trustee residency: All trustees must be UK non-resident, and there must be no UK resident protectors or participants with decision-making authority.
  
• Beneficiary profile: The trust deed must not guarantee benefits to UK resident beneficiaries; distributions should be discretionary and controlled offshore.
  
• Governing law and jurisdiction: The trust must be governed by Guernsey law and administered in Guernsey. Additionally, it must not hold UK situs assets or have UK-connected trustees.

Although offshore trusts offer certain benefits – such as flexible succession options – and can complement a SIPP for UK non-resident beneficiaries, their feasibility and appropriateness must be considered in light of potential periodic IHT and exit charges arising from the SIPP’s UK situs status. Therefore, specific UK tax advice should be sought when contemplating this as a possible option.

Section 2: Externalising UK Situs Assets, QNUPS and Offshore Trusts

Option 1: Contributing UK Situs Assets to a QNUPS

A Guernsey-based QNUPS allows UK and non-UK assets to be contributed without triggering UK CGT or IHT for both UK long-term residents and non-residents.

Key Benefits

• No chargeable transfers: Contributions do not attract UK IHT charges.
• No UK CGT on entry: Transfers of assets do not crystallise CGT under Section 271 of the Taxation of Chargeable Gains Act (TCGA s271).
• Preserves NRB: The individual’s nil rate band remains intact for other estate planning purposes.
• Tax-efficient growth: Assets typically grow tax-free within the QNUPS.
• Succession planning: Not UK situs, outside UK probate; benefits are distributed according to the member’s wishes.

Importantly, a QNUPS can settle its death benefits into an offshore trust, which can have UK resident beneficiaries. This is far more efficient than paying death benefits from the QNUPS to a UK resident, which could include income tax charges if the member of the QNUPS died over the age of 75.

Rather, the offshore trust retains the assets, keeping them outside the scope of UK IHT, with all income and gains rolling up without additional taxation within the trust. The advantage is that future distributions to UK resident beneficiaries can be timed and structured for maximum tax efficiency.

If the QNUPS is held by a long-term resident post-2027, it will be considered property in the estate and may be subject to IHT, depending on the status of the beneficiary (e.g., a spouse, child etc).

Option 2: Internationalising UK Assets and the Use of Offshore Trusts

Trusts offer significant advantages for UK non-residents holding UK situs assets and seeking multi-generational planning.

However, appropriate steps must be taken when dealing with such assets so as not to trigger tax charges.

1. Remove UK situs status: Sell UK assets or transfer them to offshore accounts in the name of the individual.
2. Settle the assets into a trust: Once reclassified as non-UK assets, they can be settled into a UK non-resident trust. However, potential tax implications in the country of residence should be carefully considered.

Key Benefits:

• No UK IHT exposure after settlement.
• The growth in the trust is typically tax-free.
• Flexibility in distributing to multiple beneficiaries.
• Protection from political instability, creditor claims, and third-party claims.
• The timing and nature of the distributions can be managed for maximum tax-efficiency.
• Succession of trust assets outside of UK IHT.
• UK nil rate band preservation.
• Multi-generational discretionary planning.

Conclusion

Advisers serving British expatriates can utilise Guernsey-based QNUPS and offshore trusts to internationalise their clients’ UK assets, including SIPP death benefits.

These structures can be employed to varying degrees, depending on whether the individual is a UK non-resident, a long-term UK resident, and on the value and nature of the assets involved.

In either case, advisers to British expatriates now have the opportunity to restructure their clients’ affairs – delivering significant, immediate tax savings while providing greater certainty for clients and their families in light of the decoupling of UK IHT from domicile.

In Case You Missed it

Please click HERE to read our article on Mitigating UK IHT – Strategic Wealth Planning for British Expatriates.

Contact Us

If you have any questions regarding this bulletin, contact us on +44 (0) 3333 078888 or +27 (0) 21 851 5584 or via email at advisers@trustandpension.com.