Start planning. From April 2027, the UK government will include most defined contribution pensions and death benefits in Inheritance Tax (IHT) calculations. This is a major change that UK expats cannot afford to ignore. If you have UK pension pots, you need to take action now.
Why This Matters: Pensions Are No Longer Safe from the Taxman
Until now, unused pension pots have been a tax-efficient way to pass wealth to your loved ones. If you died before the age of 75, your beneficiaries could inherit your pension tax-free. Even after 75, only income tax applied when they drew from it. No inheritance tax was due.
From April 6, 2027, this changes dramatically.
Under new rules announced in the 2024 Autumn Statement, the value of most unused pensions will be added to the deceased’s estate and potentially taxed at 40%. For many estates, this could add tens of thousands in tax. And for expats—who often have one foot in the UK system and one abroad—it adds another layer of complexity.
This is no longer theoretical. It is confirmed government policy. Ignore it, and your beneficiaries could lose out massively.
What’s Changing: A Breakdown of the 2027 Changes to IHT on Personal Pensions
Here’s a clear summary:
- From 6 April 2027, defined contribution pension funds and uncrystallised benefits (i.e., not yet accessed or drawn down) will be included in your estate for inheritance tax purposes.
- Pension scheme administrators, not your executor, will deduct the tax before any funds are released to beneficiaries.
- Dependants’ pensions (e.g. income for a surviving spouse or disabled child) and charity lump sums remain IHT-free.
- This change will apply regardless of where you live.
That last point is critical. Just because you’re living in Thailand, Spain, Australia or anywhere else, doesn’t mean you’re immune. If your pension is UK-based, and your estate crosses the threshold, you could face a significant IHT liability.
Real-World Example: A Typical Expat Case
Let’s say you’re 73, living in Thailand. You own a UK property worth £400,000, have £50,000 in savings, and an untouched pension pot of £100,000. That’s a total estate value of £550,000.
Under current rules:
- The pension is tax-free.
- The rest of the estate (£450,000) is under the IHT threshold (£500,000 if you include the residence nil-rate band).
- No IHT to pay.
From April 2027:
- The pension is added to the estate.
- Total estate value = £550,000.
- That’s £50,000 above the threshold, taxed at 40% = £20,000 tax bill.
Same person, same assets, completely different outcome.
What the Government Says: “Fairness”
According to the Treasury, the goal is to “deliver a fairer and less economically distorted tax treatment of inherited assets.” In other words, they’re closing a loophole where pensions were being used as a backdoor inheritance fund.
Let’s be clear. The government sees the IHT-free pension pot as a distortion. They’re coming for it.
Who Will Be Affected Most?
- Expats with UK-based pensions they haven’t touched.
- Anyone with total assets above £500,000 (including pensions).
- Those who die after age 75, whose beneficiaries already face income tax on withdrawals.
- Families who expected to use pensions as tax-efficient inheritance tools.
Even if your estate is currently below the threshold, inflation or property values could push you over by 2027.
What You Can Do Now: Practical Steps
- Review Your Estate and Pension Assets
Get a clear valuation of your pension pots, UK property, and other assets. Combine them to understand your exposure. - Check Your IHT Allowance
Every UK individual has a £325,000 allowance, plus a £175,000 residence nil-rate band if passing on a home to direct descendants. But pensions have never counted towards this until now.- From 2027, they will.
- Update Your Will and Pension Nominations
Make sure your pension death benefits and your will align. This is more than legal housekeeping. Discrepancies can cause delays, disputes, or tax inefficiencies. - Speak to an IHT-Savvy Financial Advisor
You need someone who understands cross-border tax and estate issues.
Offshore trusts, gifting, early drawdown, and life insurance are all tools that might help but only with proper advice.
- Consider Drawing Down Before 2027
If your pension pot is large and untouched, you may want to begin withdrawals before April 2027. Yes, you might pay income tax now—but it could be less than 40% IHT later.- Just be aware of your income tax brackets and possible impact on other benefits.
- Use Annual Gift Exemptions
If you’re financially stable, consider gifting assets now. Gifts made more than 7 years before death can fall outside your estate for IHT purposes. - Don’t Rely on Dated Advice
Many financial plans built over the last decade are based on the assumption pensions are outside IHT. That’s changing. Don’t base your retirement or inheritance planning on old rules.
Inheritance Tax For British Expats: You Must Act
As a UK expat, you’re in a particularly vulnerable position. You likely have UK-based pensions, a UK will, and maybe property or savings still in the UK system. But you’re out of the loop when it comes to tax updates.
This change is big. It affects:
- Your children’s inheritance
- Your retirement timeline
- How you structure your finances overseas
The message is simple: don’t wait until 2027 to deal with this. Plan now.
Don’t Let Your Pension Become a Tax Trap
The government isn’t doing this to be sneaky. It’s in the public budget. It’s in the official paperwork. And it’s been widely reported. But many expats haven’t noticed or understood what it means for them.
If you’ve kept your pension intact thinking it’s a clever tax-free inheritance vehicle, think again. That game is over.
And if you’re living overseas, it’s even more important to stay informed. Rules change. Tax systems tighten. And the UK is under pressure to raise revenue.
Useful Resources for Planning
- If you have SIPPs…
- UK Budget 2024 Highlights
- British Abroad’s Network of Professional Pension Advisors
Prepare Now or Pay Later
Don’t assume your pension is safe. From 2027, pensions are part of your taxable estate.
If you’re a British expat with UK-based assets and pension pots, you need to act.
Get advice. Adjust your plans. Start now. Waiting could cost your family tens of thousands.
We are here to help you understand, prepare, and take control before the taxman does.