The European Commission has announced that it will order Spain to appear before the European Court because of its ‘discriminatory rules relating to Inheritance and Gift Taxes’. This situation has arisen because, despite receiving two previous warnings in 2010 and earlier this year, non-resident EU citizens are still being asked to pay higher taxes than those resident in Spain.

It is a practice that is in direct contravention of the laws permitting the free movement of EU citizens within Europe, and Spanish representatives will no doubt be told that the current situation needs to be rectified as soon as possible. 

In the meantime, there is hopeful news on the horizon with the creation of the phenomenon of QNUPS (Qualifying Non-UK Pension Scheme). A mouthful indeed, but it could become a useful weapon for pensioners and an alternative to the old favourite of establishing a foreign domicile, especially since many couples who spend much of the year in Spain will still be liable for UK Inheritance Tax.

Transfers of assets between spouses upon the death of one of them are exempt from Inheritance Tax if the spouse is also domiciled in the UK or both parties are non-domiciled. Even in these cases the payment of Inheritance Tax is however merely postponed, ultimately posing a problem when the assets are passed down to a younger generation.

The option of QNUPS has been made possible only recently by the passing of new legislation. The better-known QROPS were facilitated in 2004 in response to the 2003 EU pension directives, and finally became effective in 2006. However, QNUPS could not be used until Her Majesty's Revenue and Customs had passed accompanying regulations in 2010.

QNUPS can be invested in residential property and make loans to its members to purchase personal assets, circumventing the need to apply for a loan from a bank, which are generally loath to offer finance to pensioners.

However, the main advantage to pensioners with children and grandchildren is that they are totally exempt from UK Inheritance Tax. Changes to the system initiated by Britain's coalition government have recently abolished Inheritance Tax for approved pension schemes, although they have replaced the existing 40 per cent tax rate with a charge of 55 per cent imposed before the benefits are paid to the beneficiary, irrespective of the place of residence of the benefactor or the heir. QNUPS, however, are exempt from this hefty 55 per cent tax.

In order to be considered a QNUPS, the scheme must have the same retirement age as applies in the UK, it must provide an income on retirement and it must be open to the local population in the area in which it is established and be recognised there for tax purposes.

UK expatriates who choose to remain UK domiciled would be well advised to set up a QNUPS, especially if they plan ultimately to return to the UK, as then they will not only be liable for the UK Inheritance Tax advantage, but the underlying income and capital gains will also be exempt from UK tax.   

If you would like to know whether a QNUPS scheme could be the right choice for you and your family, the team at Perez Legal Group will be able to offer advice and help you to minimise your Inheritance Tax burden.