Moving overseas may feel liberating, but it also brings fresh financial complexities, especially when it comes to UK pensions. If you’re a British expat or planning to retire abroad, understanding how UK inheritance tax (IHT) rules apply to your pension could make a big difference to your estate planning. With recent rule changes, what used to be a tax-free inheritance route may no longer hold that benefit.
What’s Changing—and When?
Until recently, defined contribution pensions (like SIPPs and SSAS) were typically excluded from UK inheritance tax, making them a powerful tool for estate planning. Starting 6 April 2027, however, unused UK pension pots will become part of your taxable estate and subject to the standard 40% tax rate above the nil-rate band. Simultaneously, 6 April 2025 brings in a new residence-based test, replacing the old domicile rules. Your IHT liability will now depend on how long you’ve been a UK resident within the previous 20 years.
Residence-Based IHT: Why It Matters
From April 2025, if you’ve lived in the UK for 10 out of the last 20 tax years, you’ll be treated as a long-term UK resident. That status can linger for 3 to 10 years after you leave, depending on how long you lived in the UK. During this period, both UK and foreign assets, including pensions, may be subject to IHT. That makes timing and careful documentation essential.
What It Means for Your UK Pension
- Before April 2027, UK pension funds held by expats were typically excluded from IHT; they didn’t count as part of your estate.
- After April 2027: Any unused pension funds are treated as part of your estate and may be taxed at 40% above your inheritance threshold.
Cross-Border Nuances: Local Taxes & Double Treaties
Your local country may also tax inherited pensions. Some jurisdictions don’t recognise UK trust-based payments, which can mean extra local income tax or even reduced tax efficiency. Double taxation agreements can help, but only if the treaty includes pension income provisions. Understanding both sets of rules is essential to managing your estate effectively.
Planning Strategies For Expats
- Review your residence history: Knowing whether you are counted as a long‑term UK resident shapes your IHT outlook.
- Complete nominations: Clearly nominate pension beneficiaries so funds can pass directly and smoothly, without delay.
- Track paperwork closely: Executors will need full details of pension schemes after death—failure to disclose within six months can trigger penalties from £100 up to £3,200.
- Consider QROPS or QNUPS: These overseas pension structures, when compliant, may protect your pension from UK inheritance tax, especially when based in tax-neutral jurisdictions like Gibraltar or the Isle of Man.
- Cross-border professional advice: Seek guidance from professionals familiar with both the UK and local tax regimes.
Conclusion
If you’re an expat with UK pension savings, the coming changes in UK inheritance tax rules mean it’s more important than ever to act now. From April 2025, you may still be treated as UK‑resident for tax, while April 2027 brings UK pension assets fully into the IHT net. Planning ahead, keeping your documents clear, and working with advisers versed in international rules can help ensure your loved ones receive the maximum benefit from your pension.
With these shifts on the horizon, early, proactive planning gives you control and peace of mind for the future.
