Your UK Pension May No Longer Be Free from Inheritance Tax: What Expats Need to Know? 

From 6 April 2027, most unused UK pension funds, which are retirement savings pots or guaranteed income benefits that remain untouched by choice or circumstance (such as leaving a defined contribution pot invested past retirement age or deferring a defined benefit income) and pension death benefits will be included within an individual's estate for UK Inheritance Tax purposes. This is confirmed law, having received Royal Assent as part of the Finance Act 2026 on 18 March 2026. For British expatriates, the question is not simply whether this applies; it may, but how it interacts with UK residence history, the new long-term resident rules, and a wider estate plan that may not have been reviewed since pensions were outside the IHT net.

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Table of Contents

1. Key Takeaways

2. What Is Changing and When?

3. Does This Affect Expats Living Overseas?

4. What Is Included and What Remains Exempt?

5. The Double Taxation Risk After Age 75

6. Who Becomes Liable for the Tax?

7. Who Should Review Their Position?

8. What Can Expats Do?

9. Planning Ahead Matters

10. Frequently Asked Questions
    

Key Takeaways 

1. From 6 April 2027, most unused pension funds and pension death benefits will be added to the value of an individual's estate for UK Inheritance Tax, confirmed law under the Finance Act 2026. Unused pension pots will no longer sit outside the scope of inheritance tax.

2. The strategy of preserving an unspent pension to pass on as a tax-free lump sum is fundamentally less effective from this date. What was free from inheritance tax is now included in the estate.

3. For deaths at or after age 75, IHT and income tax can both apply. Combined effective rates modelled at 67% or higher for larger estates.

4. Expats are not automatically exempt. UK-established pension schemes may fall within the charge regardless of where the holder is now resident, and long-term UK residency can extend IHT exposure on worldwide assets for up to 10 years after leaving.

5. Personal representatives, not pension scheme administrators, are responsible for reporting and paying the IHT. Beneficiary nominations and estate plans are best reviewed in advance rather than during probate.

6. Planning opportunities still exist before April 2027, including drawing down the pension during lifetime, reviewing estate structures, updating nominations, and reassessing retirement income sequencing.

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What Is Changing and When?

For many years, UK pensions have been widely used as a tax-efficient way to pass wealth between generations. Unlike most other assets, unused pension funds have generally fallen outside an individual's estate for UK Inheritance Tax purposes - meaning they could be passed to beneficiaries free of IHT, and in many cases free of income tax too where the pension holder died before age 75.

That is changing. From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of the value of an individual's estate for inheritance tax purposes, regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits.

This reform, legislated in the Finance Act 2026, aims to remove distortions that encouraged the use of pension savings for intergenerational wealth transfer rather than for income in retirement. Secondary legislation and detailed HMRC guidance are still being finalised ahead of April 2027 implementation.

The implications are significant. Many people have structured their retirement income strategy specifically around leaving their pension pot untouched, drawing from ISAs, property, and other assets first to draw income, precisely because unused pension funds no longer sat outside the estate for inheritance tax purposes was the core logic of that approach. If you hold a meaningful pension fund or have relied on "leave the pension untouched, spend other assets first" as part of your estate plan, this is worth understanding properly.

It is also worth understanding what has not changed. The income tax situation is unchanged: certain death benefits may be paid free of income tax where the member dies before age 75, subject to the type of benefit, the available lump sum and death benefit allowance, and relevant payment or designation deadlines. It is the IHT layer that is new, and the interaction between income tax on withdrawals and IHT for deaths at or after age 75 that creates the most significant planning consideration.

Read more: UK Pension for Expats: State Pension Guide 2026

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Does This Affect Expats Living Overseas?

Many British expatriates assume that living outside the UK automatically removes them from UK Inheritance Tax exposure. The reality is more complex, and this is where many expats get caught out. From 6 April 2025, the UK moved to a residence-based inheritance tax system. The key test is whether someone is treated as a long-term UK resident. If they are, their worldwide estate may fall within the UK IHT framework. If they are not, the UK position may be more limited, although UK-situs assets can still be relevant.

Under the long-term resident rules, an individual who has spent a sufficient number of years living in the UK may retain UK IHT exposure on worldwide assets for a period after they leave, between three and ten consecutive tax years depending on their previous UK residence history, with transitional rules for individuals who left the UK before 6 April 2025. Leaving the UK does not immediately and automatically end that exposure.

Specifically, regarding the new pension rules, the position is more targeted. From 6 April 2027, pension funds held in UK-registered schemes will generally fall within the new IHT charge regardless of where the pension holder is now resident. For funds held in non-UK schemes, including QROPS and QNUPS, the IHT position depends on the individual's long-term UK residence status, the type of scheme, and where the scheme is established. Overseas arrangements should not be assumed to sit outside the charge without reviewing the specific structure.

This matters for expatriates who may have ceased to be UK residents years ago but still hold pension pots accumulated during their UK working lives. Both the individual's residence history and the pension scheme's own status are relevant to whether the new charge applies.

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What Is Included and What Remains Exempt?

Not all pension-related benefits are caught by the new rules. Certain transfers and benefits remain exempt from inheritance tax, including:

1. Benefits passing to a spouse or civil partner, where the spouse or civil-partner exemption applies

2. Death-in-service benefits paid from a registered pension scheme

3. Dependants' scheme pensions paid from defined benefit or collective money purchase arrangements

4. Transfers to registered charities

5. Survivors' pensions under joint life annuities

Understanding what falls inside versus outside these exemptions is an important first step before assuming a pension is automatically exposed to IHT. Where a pension or pension annuity is passed to an exempt spouse or civil partner, the charge generally does not arise at that point, though it may arise when the surviving spouse or civil partner's estate is assessed. A couple could potentially benefit from two sets of allowances and exemptions, depending on how the estate is structured.

The GOV.UK technical note on the pension IHT changes sets out how the legislation will operate for personal representatives, pension scheme administrators, and beneficiaries.

The Double Taxation Risk After Age 75

One of the most significant and often overlooked aspects of the change relates to pension holders who die aged 75 or over. Where the pension holder dies before age 75, certain inherited pension benefits may be paid free of income tax, subject to the type of benefit, available allowance limits, and relevant payment deadlines. Where the pension holder dies at or after 75, inherited pension benefits drawn by a beneficiary are subject to income tax at the beneficiary's marginal rate as they are now.

From April 2027, when IHT is also payable on the pension when you die, both taxes can apply, creating a tax bill that draws on the same pension pot from two directions. Because of the way the two taxes interact, IHT first, then income tax on what remains, the combined effect can be substantial. Using widely quoted industry modelling, a £100,000 pension taxed at 40% IHT and then at the additional-rate taxpayer's marginal income tax rate could leave the beneficiary with roughly £33,000, an effective combined rate of roughly 67% in that scenario, though the actual outcome will vary depending on the estate value, available thresholds, and the beneficiary's own tax position. Some commentators have modelled even higher effective rates for larger estates where other reliefs are also tapered away.   

Full HMRC guidance on the practical mechanics is still being finalised. The central point is nonetheless clear: pension wealth that was previously free from inheritance tax will no longer usually sit outside the scope of inheritance tax, and the strategy of preserving an unspent pension pot to pass on tax-free fundamentally changes from 6 April 2027. For those aged 75 or over, and for those planning for that stage, the maths behind that approach needs to be revisited.

The Nil-rate Band

IHT is charged at 40% on the value of an estate above a threshold of £325,000, which is the nil-rate band. Any unused threshold may be transferred to a surviving spouse or civil partner, giving a combined threshold of up to £650,000. A further residence nil-rate band of up to £175,000 applies where a qualifying home is left to direct descendants, taking a single individual's total to £500,000 and a couple's to up to £1,000,000. Both thresholds are now frozen until 5 April 2031. As pension funds are added to the value of the estate from April 2027, more estates that previously sat below these thresholds may find themselves within scope.

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Who Becomes Liable for the Tax?

HMRC has confirmed that personal representatives, rather than pension scheme administrators, will be liable for reporting and paying any inheritance tax due on unused pension funds and pension death benefits. Personal representatives will be able to direct pension scheme administrators to pay IHT directly to HMRC before pension funds are released to beneficiaries. Personal representatives will also have the power to issue a withholding notice to pension scheme administrators, instructing them to withhold up to 50% of pension funds for up to 15 months from the end of the month in which the individual died.

Once a pension benefit has been allocated or vested in a beneficiary, that beneficiary may become jointly and severally liable for the IHT attributable to their benefit. This is an important administrative shift. Family members handling an estate will need to understand pension exposure in advance, rather than discovering the tax owed during probate. Beneficiary nominations for defined contribution, workplace, and private pensions should be reviewed alongside the wider estate plan rather than left as a separate, rarely revisited document.

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Who Should Review Their Position?

These changes may be particularly relevant if you:

• Have built up a significant UK pension fund

• Plan to return to the UK later in life

• Have spent substantial periods living and working in the UK

• Want to leave pension assets to children or future generations

• Have previously viewed your pension as a tax-efficient wealth transfer tool

• Have a wider estate that may already be approaching UK Inheritance Tax thresholds

• Hold non-UK pension arrangements alongside a UK pension

Your future residency plans can be just as important as your current location. An expatriate who has lived overseas for many years with no intention of returning may have a very different position from that of someone who plans to retire to the UK. Both situations warrant a review; the analysis is just different.

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What Can Expats Do?

Although the rules are changing, planning opportunities remain available before April 2027.

1. Review your retirement income strategy - Historically, many people chose to preserve their pension and use other assets first - ISAs, property, savings - because pensions were outside the estate for IHT. With the new rules, that approach may no longer be optimal. Drawing from the pension during your lifetime, rather than preserving it as an inheritance, may be more effective depending on your circumstances. A review of how, when, and whether to access different retirement income sources can help ensure assets are used in the most efficient way.  
Read more: Balancing retirement income and expenses as an expat.

2. Review your estate plan - Your wider estate planning should be reviewed alongside your pension arrangements. This may include reviewing your Will, checking pension beneficiary nominations, understanding how assets will pass between generations, and ensuring your plans remain aligned with your family's objectives.

For those looking to mitigate a potential IHT liability and reduce the value of their estate, additional tools may be relevant: gifting assets during your lifetime (noting that such gifts are potentially exempt transfers, which may fall outside the estate after seven years, subject to the rules, and that taper relief, where available, reduces the tax rather than the value of the gift), using the annual gifting allowance, making use of the small gifts exemption of up to £250 per recipient, per tax year, gifting from surplus income under the normal expenditure out of income exemption, or taking out whole of life insurance written in trust to meet the tax bill without reducing the assets passed to beneficiaries.  
Read more: Estate planning checklist for expats and HNW individuals and Succession planning with multi-jurisdictional assets.

3. Consider your future residency plans - For expatriates, future location decisions can have significant financial implications. Returning to the UK in retirement may change exposure to UK taxation, including IHT. Understanding these implications before making a move provides greater clarity and more time to consider available options.

4. Take a holistic approach -The type of pension matters; defined contribution pensions, including workplace schemes and personal pensions such as SIPPs, are generally within the scope of the new rules, while certain other structures may not be. The money in your pension, the wider value of your estate, and your intentions all need to be considered together. A strong financial plan brings together UK pensions, international investments, retirement income planning, estate planning, and wealth preservation. For expats, the 2027 pension IHT change cannot be reviewed properly without first understanding whether UK inheritance tax applies and to what extent.

Planning Ahead Matters

The changes coming into effect from April 2027 provide an opportunity to review financial plans before the new rules apply. Rather than focusing solely on tax, the key question is: does the current financial strategy still support retirement goals and the legacy intended, given that one of the main tools historically used to pursue that legacy has fundamentally changed?

For many expats, a review of pensions, investments, residency position, and estate planning before April 2027 can identify opportunities and ensure wealth is structured appropriately for the future. Reviewing plans before April 2027 generally gives more flexibility to consider available options than acting after the rules have changed.

At Melbourne Capital Group, I help British expatriates navigate the complexities of international financial planning. Our approach considers the complete picture; pension planning, investment management, retirement strategies, wealth preservation, life and health protection, and estate planning. By coordinating these areas, I help clients make informed decisions and build financial strategies tailored to their lives, wherever they are in the world.

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Click here to watch a webinar on how to navigate your pensions. Throughout the series, we will provide essential guidance on pension management and offer strategies to ensure a financially secure retirement overseas. 

If you have any questions about your pension, insurance, or investments, you may reach out to Adam Humphries at adamhumphries@melbournecapitalgroup.com or connect with him on Linkedin

Disclaimer: This article is provided for general information and educational purposes only and does not constitute financial, investment, legal or tax advice, nor is it a recommendation to take any particular course of action. Inheritance Tax legislation is complex, subject to further secondary legislation and HMRC guidance, and individual circumstances vary significantly. Rules and regulations may change, and independent professional advice - including legal and tax advice - should always be sought before making any financial decisions. Any financial services provided by Melbourne Capital Group are subject to the scope of the firm's applicable regulatory licences and the laws of the relevant jurisdictions.

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Frequently Asked Questions

1. Will this change apply if I am not a UK resident when I die?
   The position depends on whether you are treated as a long-term UK resident under the new residence-based IHT rules, and whether your pension is held in a UK-established scheme. Pension funds held in UK-established schemes may fall within the new IHT charge even where the pension holder is not a long-term UK resident at the date of death. Non-UK-established pension schemes may sit outside the charge for non-long-term UK residents. Your UK residence history and your pension scheme's jurisdiction both matter.

2. Should I start drawing from my pension before April 2027?
   Whether drawing from the pension sooner makes sense depends on your income tax position, retirement timeline, other available assets, and the size of the pension fund relative to the rest of your estate. There is no single right answer - for some, drawing down the pension during lifetime will be more efficient than preserving it for inheritance; for others, different strategies may be more appropriate. This is a decision that benefits from professional advice rather than a default assumption either way.

3. Does this affect beneficiary nominations I have already made?
    Existing beneficiary nominations remain valid, but the IHT implications of those nominations now need to be factored into estate planning in a way they did not before. Where a nomination directs funds to an exempt beneficiary, such as a spouse, IHT may not arise at that stage, but may arise later. Reviewing nominations alongside the wider estate plan, rather than treating them as a separate, set-and-forget document, is advisable before April 2027.

4. What is the combined tax burden for beneficiaries where the pension holder dies after age 75?
   Where IHT is charged on the pension in the estate, and the beneficiary subsequently draws on the inherited pension, income tax at the beneficiary's marginal rate applies on those withdrawals. Industry modelling suggests combined effective rates of roughly 67% or higher for additional-rate taxpayers in larger estates, where other reliefs are also tapered. These are modelled figures based on the rules as legislated. Full HMRC guidance on the practical mechanics is still being finalised ahead of April 2027.

5. How does this interact with the IHT changes to non-UK domicile rules?
   From April 2025, the UK moved from a domicile-based to a residence-based IHT system. Long-term UK residents face IHT on worldwide assets, including pensions, for a period after leaving the UK. The 2027 pension IHT changes add a further layer: UK-established pension schemes may fall within the new charge regardless of the holder's long-term resident status. These two sets of changes interact and understanding both is necessary for a complete picture of IHT exposure.

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