The countdown to April 2027: UK pensions, inheritance tax and opportunities for expatriates

A major change to how pensions are taxed on death is now just months away. Pension funds that have traditionally sat outside the inheritance tax net will become part of your taxable estate from 6 April 2027. For British expatriates, understanding the new rules – and exploring potential planning opportunities – is increasingly important.

For as long as most people can remember, a UK pension has been one of the few assets that could usually be passed on to beneficiaries without inheritance tax (IHT). That is about to change, and this reform deserves your full attention.

From 6 April 2027, unused pension funds and death benefits will be brought into the scope of UK IHT for the first time. For many families, this will represent the single biggest factor increasing their future inheritance tax liability.

More families are being affected

Inheritance tax is no longer just a concern for the very wealthy. More families are now finding themselves affected due to frozen allowances and rising asset values.

The inclusion of pension funds from 2027 will accelerate this trend. For many people, their pension is their largest or second-largest asset. Including it within their estate could transform a relatively modest inheritance tax exposure into a far heavier one almost overnight.

If you have built up significant pension savings during your working life, now is the time to understand how the new rules could affect your estate and how to reduce the eventual tax burden on your family and heirs.

Expatriates are not exempt

A common misconception is that moving abroad removes you from the UK inheritance tax system. Unfortunately, it is not that simple.

Under the current rules, most individuals remain classified as UK long-term residents for the first ten years after leaving the UK. During that period, their worldwide estate remains within the scope of UK inheritance tax.

Once you have spent at least 10 of the previous 20 tax years outside the UK, you gain UK non-long-term resident status. At that point, overseas assets typically fall outside the UK inheritance tax net. However, all your UK-situated assets – including pension funds – will continue to be assessed and taxed if they breach the thresholds.

A typical expatriate example

To illustrate the impact, consider Peter and Jane, a British couple who moved from the UK to Southern Europe in 2022. They retained a UK property valued at £510,000, purchased a home in their new country of residence worth £370,000 and kept £220,000 invested in the UK. Peter holds a £690,000 Self-Invested Personal Pension, while Jane’s SIPP is £160,000. On first death, all assets will pass to the surviving spouse.

Today, with pensions excluded from the estate, their taxable position looks manageable. Once the SIPPs are drawn into the calculation, the picture changes dramatically.

*Main Nil-Rate Band and Residential Nil-Rate Band

The inheritance tax liability rises from just £40,000 to £380,000 solely because the pension funds become taxable. What was previously a relatively modest liability becomes a substantial six-figure tax bill – 850% higher.

This example has been simplified for illustration purposes and individual circumstances will vary. It considers UK inheritance tax only and does not take account of any inheritance or succession taxes that may apply in your country of residence. The broad principles generally apply whether Peter and Jane live in Spain, Portugal, Cyprus, Malta or most other countries, although local tax rules differ. In France, the French home would only be liable to French succession tax if they are resident there and not to UK IHT.

Tax does not necessarily stop at 40%

Inheritance tax may not be the only charge payable on inherited pension funds.

Depending on the age at death, the benefits received and the beneficiary’s tax position, income tax may also apply when pension death benefits are drawn. As a result, the overall tax burden on inherited pension wealth can be significantly higher than many families expect – up to 67%.

A valuable opportunity for long-term expatriates

This is one area where long-term expatriates can have planning opportunities that UK residents do not. Once you have passed the ten-year mark to become a UK non-long-term resident, your non-UK assets fall outside the scope of UK inheritance tax altogether.

Some expatriates may also explore transferring their pension arrangements outside the UK. While this can preserve the current position of IHT-free pensions, it depends on the type of scheme and needs careful thought — most transfers trigger the UK’s Overseas Transfer Charge. Even so, some expatriates find the long-term tax savings worth it once weighed against ongoing UK tax exposure, but it’s essential to take in-depth, personalised advice before acting. Spain residents should be aware that a UK pension transfer can trigger substantial Spanish tax liabilities.

Even without touching the pension, there may still be opportunities to reduce exposure by reviewing UK-situated assets. Using Peter and Jane as an example, they could sell their UK property, their investment portfolio, or both, and reinvest the proceeds outside the UK.

As the table shows, restructuring where assets are held can make a dramatic difference to the final bill – in this case, turning a six-figure UK liability into nothing at all.

There are other tools too

Moving assets out of the UK is one potential way to mitigate inheritance tax, but it is not the only one. Making full use of available allowances, gifting strategies and transfers between spouses and civil partners (plus the other exemptions and reliefs) can also play an important role.

The right approach depends on your circumstances, family objectives, country of residence and long-term plans. What works well for one family may be entirely unsuitable for another.

Don’t leave it until the last minute

The clock is ticking towards April 2027, and effective pension, tax and estate planning takes time. Reviewing your assets, restructuring investments where appropriate and ensuring your arrangements remain suitable can all take many months to implement properly – HMRC paperwork alone can take the best part of a year.

Delaying could leave your family exposed to a significantly higher tax bill. Seek advice and start exploring solutions now. The most suitable solution will depend entirely on your personal circumstances, country of residence and long-term objectives.

Personalised advice for long-term peace of mind

At Blevins Franks, our cross-border specialists provide integrated pension, tax, estate planning and investment advice, tailored to your circumstances and country of residence.

We will

• Review your personal situation, objectives and all your options
• Explain the UK and local tax implications, and help you weigh the pros and cons
• Recommend tax-efficient investment and estate planning strategies suited to your risk profile and goals
• Guide you through implementation, with ongoing advice and reviews as your circumstances change

Get in touch with Blevins Franks today to arrange a personal consultation and find out exactly how the 2027 pension changes could affect your family – and what you can do about it.