The super-rich are being advised how to use a loophole in pensions investments to shelter their wealth from Labour’s clampdown on large-scale tax dodging, the Guardian can reveal.
Undercover filming by the Guardian suggests multimillionaire UK residents are being pitched offshore products said to legally protect their fortunes from inheritance tax (IHT) and capital gains tax (CGT).
At a private event held a week before the general election, the international accounting brand Baker Tilly told advisers to the ultra-wealthy how they could use offshore pension schemes to shield their clients’ fortunes from tens of millions of pounds of inheritance taxes.
One promoter told how his client had placed £30m into a pension scheme to protect it from inheritance taxes.
He told an undercover reporter at the exclusive event in the City of London that the government would not legislate to close the schemes down as ministers have “bigger fish to fry”.
While the schemes are legal, critics argue tax avoidance is immoral and deprives the public purse of hundreds of millions of pounds that could fund vital services.
Labour has promised to renew the focus on tax avoidance by “the wealthy” to “ensure everyone pays their fair share” as it grapples with threadbare public finances and growing demands to settle long-running disputes over public sector pay and benefits. The chancellor, Rachel Reeves, is due to give more detail about the state of the public finances next week, a move expected to pave the way for tax rises.
The Guardian revealed in June that Labour was drafting ways to raise money through extra wealth taxes after the election, with changes to CGT and IHT under consideration – measures that could raise up to £10bn. Labour has also said it will clamp down on the “non-domicile” regime, which allows people to live in the UK and not pay tax on their overseas income.
At the event run by a company called the Private Client Dining Club, held days before the general election, advisers to the super-rich were told how to exploit a little-known offshore tax loophole.
Stuart Clifford, a principal at Baker Tilly Isle of Man, explained to an undercover reporter: “My last one I did of these – £30m … [The client] said … ‘That’s my kids’ money. So let’s protect it from IHT today.’ [The] day he got it – £30m [went] into [the offshore product]. He’s not doing anything funky. He’s not paying a lot for it, that’s just going through investment managers and what have you.”
Inheritance tax is typically charged at a rate of 40% above a £325,000 threshold for fortunes given away to a non-spouse or non-civil partner – implying almost £12m of taxes saved by the Baker Tilly client’s children.
Baker Tilly Isle of Man declined to reveal the value of assets it had helped clients place into these schemes during the past five years, but said “the remarks attributed to us have been taken out of context from the much wider discussions surrounding retirement planning”.
The product the company was promoting at the event is a little-known offshore retirement plan called a qualifying non-UK pension scheme (QNUPS), which is available to UK residents.
The scheme relies on current tax rules that exempt pension assets from certain taxes. Clifford suggested offshore pensions could be used by rich individuals to avoid future taxes on property investments.
“The amount of people who have got property where they are potentially one day sitting on a big capital gains liability, a big inheritance tax liability,” he said.
A week before the election, Clifford predicted that neither Labour nor the Conservatives would change the law to stop rich individuals using QNUPS as a method of avoiding IHT, as specific rules would need altering.
“[It is] UK law, which is why I say I don’t care what the red and blue team do to IHT [after the election],” he added. “It isn’t going to change the QNUPS regulations because [QNUPS have] an exemption from whatever [the IHT rule] looks like. It’s that simple.”
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Claire Aston, the director of the campaign group TaxWatch, said: “For a well-known accountancy firm such as Baker Tilly to be caught on camera saying that the government won’t be looking at this as they have ‘bigger fish to fry’ is clear evidence that they consider this to have nothing to do with retirement pensions – but is an avoidance scheme for UK inheritance and capital gains tax.
“Given the new Labour government’s commitment to clamp down on tax avoidance, this looks like a great place to start. The law needs to change to stop UK resident taxpayers shuffling valuable assets offshore for the sole purpose of saving tax”.
Pension schemes have long been exempt from IHT in the UK. However, QNUPS – which are sold by a range of different companies that typically focus their sales pitches on the tax savings – have added advantages to wealthy investors. Those benefits include “no limit on the size of your contribution”, as well as the schemes allowing individuals to invest “a much broader range of asset classes than traditional pensions [including] property, stocks, shares and art/antiques”.
Clifford added that using QNUPS to avoid capital gains taxes due on property investments was “massive” – and that the company insisted any client taking up the pension product took “tax advice”.
He said: “As soon as it’s in [the QNUPS] – bang – that’s the protection. It’s a statutory exemption. It’s not a loophole. It’s not a grey area. It’s a statutory exemption.”
Inheritance tax raises about £7.5bn a year for the exchequer but the levy is considered relatively simple to avoid.
A paper called Reforming Inheritance Tax, which was published in September 2023 by the Institute for Fiscal Studies, stated: “There are several problems with the current design of inheritance taxation … the total exemption of pension pots from inheritance tax, open up channels to avoid the tax and are consequently costly and inequitable.”
There have been a series of stories over the past week hinting that the new Labour government is considering introducing changes to the way the exchequer collects inheritance and capital gains taxes. These include suggestions that the chancellor is coming under pressure to launch a £2bn inheritance tax raid on pension pots to help fund public spending pledges.
A spokesperson for Baker Tilly Isle of Man said: “QNUPS, the regulations for which were introduced by HMRC in 2010, is just one of several well-established retirement solutions that Baker Tilly Isle of Man offer as a pension provider to UK and overseas citizens and is at all times administered in accordance with the required laws and regulations in place in the UK. For a pension scheme to be recognised as a QNUPS it must meet strict HMRC guidelines.
“Any individual wishing to register for QNUPS is expected to obtain independent tax advice (UK or otherwise as appropriate to their circumstances) as evidence of their suitability to be accepted as a member.
“All of the advice that Baker Tilly Isle of Man gives to its clients is compatible with existing UK legislation and we will of course comply with whatever changes (if any) the new UK government choose to make.”
