Pensions Coming Into UK Inheritance Tax From April 2027: What Expats Should Do

by Adam Fayed on

From April 6, 2027, most unused pension funds and pension death benefits will be included in the UK inheritance tax (IHT) calculation, potentially increasing the tax payable when a pension holder dies.

For expats with UK pensions, overseas property or beneficiaries living in different countries, the change makes pension and estate planning more closely connected.

The impact will depend on the type of pension, the value of the wider estate, the individual's UK residence history and the tax rules applying in their country of residence.

Key Takeaways

  • Most unused pension funds and death benefits will enter the UK IHT calculation from 6 April 2027.
  • Living abroad does not automatically eliminate UK IHT exposure.
  • Pension withdrawals, gifts and beneficiary nominations warrant a review before the changes take effect.
  • Expats may need cross-border advice on UK IHT, local taxes and inherited pension income.

I can connect you with expert tax support for your specific situation. My contact details are hello@adamfayed.com and WhatsApp ‪+44-7393-450-837 if you have any questions.

The information in this article is not tax advice and may have changed since the time of writing.

What is changing with UK inheritance tax on pensions in 2027?

Most unused pension funds and pension death benefits will be brought within the value of a deceased person's estate for UK IHT purposes from April 6, 2027.

The reform was legislated for in the Finance Act 2026 and applies to deaths occurring on or after that date.

Under the previous framework, many pension funds could pass to beneficiaries outside the deceased's estate for IHT purposes, particularly where pension scheme trustees or administrators had discretion over who received the benefits.

The new rules remove much of this distinction, bringing more pension wealth into the IHT calculation.

The change generally covers unused funds in defined contribution arrangements and relevant death benefits from defined benefit schemes.

It also extends to qualifying non-UK pension schemes known as QNUPS.

However, not every overseas pension automatically falls within the new rules, so the legal classification of an arrangement matters.

Certain benefits remain outside the reform, including qualifying death-in-service benefits payable from registered pension schemes and specified dependant's scheme pensions.

Other exclusions and detailed conditions may apply.

The date of death determines which framework applies.

If a pension holder dies before April 6, 2027, the previous rules apply even if the pension benefits are distributed after that date.

How the change affects the inheritance tax calculation

The change can increase the taxable value of an estate by bringing unused pension funds into the inheritance tax calculation, potentially increasing the amount subject to IHT.

The final IHT bill is shaped by how the pension value affects the £325,000 nil-rate band, the residence nil-rate band and applicable exemptions, including transfers to a qualifying spouse or civil partner.

The standard IHT rate is 40% on the taxable amount above the available threshold, after applicable exemptions, reliefs and deductions.

An additional residence nil-rate band may be available when qualifying residential property is passed to direct descendants, subject to its conditions and taper rules.

Transfers to a qualifying spouse or civil partner are generally exempt from IHT, although restrictions can apply in certain cross-border circumstances, including where the recipient does not qualify for the full spouse exemption.

For example, an estate with £250,000 in other assets and £200,000 in unused pension funds could reach £450,000 for IHT purposes under the new rules.

Assuming the full £325,000 nil-rate band is available and no other exemptions or reliefs apply, £125,000 could be taxable at 40%, resulting in an illustrative IHT bill of £50,000.

How will inheritance tax and income tax apply to inherited pensions from 2027?

The inclusion of unused pension funds in UK inheritance tax from April 2027 could create a tax liability for beneficiaries who may also owe income tax on inherited pension withdrawals.

Generally, beneficiaries can receive eligible defined contribution pension benefits free of UK income tax if the member dies before age 75, subject to the applicable conditions.

If the member dies aged 75 or older, withdrawals are generally taxable at the beneficiary's applicable income tax rate.

The rules also provide relief against income tax on the portion of relevant pension death benefits corresponding to inheritance tax paid on those benefits.

How does UK inheritance tax work if I live abroad?

Expats with UK pensions may still face UK inheritance tax from April 2027, even if they live overseas, because the new rules bring most unused pension funds and relevant death benefits into the IHT calculation.

Since April 6, 2025, the UK has used a long-term residence framework to determine when overseas assets may fall within the scope of IHT.

Broadly, an individual can qualify as a long-term UK resident if they have been UK tax resident for at least 10 of the previous 20 tax years.

Former UK residents may remain within the long-term residence framework for a period after departure, with the duration determined by their residence history.

For expats, this makes it important to review both their pension arrangements and their residence status.

Do UK expats need cross-border estate planning advice?

UK expats with pensions, property or beneficiaries across different countries should consider cross-border estate planning advice because the interaction of residence rules, inheritance taxes and pension regulations can affect the family's final position.

The April 2027 reform makes this review particularly relevant for people who have accumulated substantial pension savings while working in the UK and subsequently retired or relocated abroad.

However, specialist advice is not equally necessary for every individual; the complexity of the estate and the potential tax exposure should determine the level of support required.

Review the pension and the wider estate together

The first step is to establish the value and classification of every relevant pension, including workplace schemes, personal pensions, SIPPs and qualifying overseas arrangements.

The review should also cover UK property, investments, bank accounts, overseas assets and existing trusts.

An estate projection can then compare the position under the current rules with the expected position for deaths on or after April 6, 2027.

This helps establish whether pension inclusion is likely to create an IHT liability and how large that liability could be.

Beneficiary nominations and wills should also be checked for consistency.

Pension nominations do not automatically override the tax rules, and a will may not govern how pension benefits are distributed under the scheme's rules.

Evaluate withdrawals and lifetime gifts carefully

Withdrawing pension funds before April 2027 is not an automatic way to avoid IHT.

Once withdrawn, the money may become part of the individual's ordinary estate, potentially leaving the same or a greater exposure while also creating income tax.

Lifetime gifts may reduce an estate in some circumstances, but UK gift rules, exemptions, the seven-year rule for many outright gifts and the treatment of assets retained for personal benefit all need consideration.

Local gift or transfer taxes may also apply in the country of residence.

Similarly, transferring a pension overseas should not be treated as a guaranteed solution.

The destination arrangement's legal status, transfer restrictions, tax consequences and potential IHT treatment must be established before a transfer is considered.

Life insurance may help provide funds to meet an eventual tax bill, but the premiums, policy ownership and possible treatment of the policy proceeds within the estate need to be assessed.

Coordinate advice across jurisdictions

A UK pension or IHT specialist can establish how the UK rules apply, while a qualified adviser in the country of residence can assess local tax and succession implications.

Where the estate spans several jurisdictions, the advisers may need to coordinate their recommendations.

The objective is to identify the most suitable arrangement for retirement income, access to capital and the eventual transfer of wealth.

A strategy that reduces one tax liability may create another, so the overall outcome matters more than any single tax calculation.

Conclusion

The April 2027 changes highlight how pension wealth can carry different financial implications at different stages of life.

Funds accumulated to support retirement may later form part of an estate subject to inheritance tax, changing the amount ultimately available to beneficiaries.

For expats with long retirement horizons, this introduces another variable into decisions about pension drawdown and asset allocation.

The consequences may extend well beyond the pension itself, influencing how much capital remains available to support a surviving partner, fund later-life care or pass to children.

FAQs

What are the exemptions for non-residents on UK inheritance tax?

Non-residents who are not long-term UK residents generally benefit from having most overseas assets excluded from UK IHT, although UK-situated assets may remain taxable.

The £325,000 nil-rate band, spouse or civil partner exemptions and other applicable reliefs may reduce the bill, while pension funds must be assessed under the rules taking effect in April 2027.

How long do you have to live abroad to avoid inheritance tax?

Former UK residents may need to live outside the UK for up to 10 tax years to fall outside the UK's long-term residence rules, based on their residence history.

Even after that period, UK-situated assets, such as UK property, may remain subject to IHT, although most overseas assets may fall outside its scope.

Do I pay tax on an inheritance from overseas?

Generally, no.

Receiving an overseas inheritance does not usually trigger UK income tax, although income or capital gains generated by inherited assets may be taxable, and the deceased's estate may have been subject to inheritance or estate taxes abroad.

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