UK Pensions and Inheritance Tax: Major Changes Coming in 2027 – Are You Prepared?

A significant shift is coming to UK pension and estate planning — and it could dramatically impact the tax legacy you leave behind. From April 2027, UK pension funds will no longer be exempt from inheritance tax (IHT). Any unused pension funds and death benefits will be included as part of your estate for IHT purposes.

This is a substantial reform — one that may affect hundreds of thousands of families, including British expatriates, regardless of how long they’ve lived abroad.

If you’ve been relying on your pension as a tax-free inheritance vehicle for your loved ones, it’s time to rethink your plans.

---

🔍 What’s Changing?

Until now, unused UK pension funds (such as SIPPs) have typically fallen outside of the IHT net. From April 2027, these assets will become liable to up to 40% inheritance tax, depending on the size of your estate and any available allowances.

The reform applies even if you live outside the UK, so expatriates in countries like Portugal, Spain, France, Cyprus, Malta, or elsewhere will also be impacted.

---

💡 Case Study: How One Family’s IHT Liability May Surge

Let’s look at a simplified example.

John and Jenny, a retired British couple now living in Portugal, own:

• Their former UK family home – £500,000
• A Portuguese property – £350,000
• UK investments – £260,000
• John’s pension (SIPP) – £720,000

📅 Today (2024)

• The pension is excluded from the estate for IHT
• Total estate liable to IHT: £1,110,000
• Combined allowances: £1,000,000
• IHT payable: £44,000

📅 From April 2027

• The pension is included in the estate
• New estate value: £1,830,000
• Allowances remain at £1,000,000
• IHT liability: £332,000

That’s an increase of 655% — a difference of £288,000. And that’s without factoring in other taxes such as income tax on death benefits.

⚠️ This impact could be even greater for those with larger pension pots, UK-based investments, or additional properties.

---

📌 Does This Apply If You Live Abroad?

Yes. Even if you’ve moved abroad, your UK-based pension remains a UK asset — and as such, will be considered part of your estate for UK inheritance tax purposes.

In many cases, UK IHT will apply for up to 10 years after breaking UK tax residence unless long-term residence or domicile status is definitively ended. Additionally:

• In Spain, your heirs may also be liable for Spanish succession tax, though a credit is usually applied for UK tax already paid.
• In France, the treatment differs — inheritance tax generally applies based on the location of the asset and residence of the heir.

This makes cross-border tax planning more important than ever.

---

⚠️ Other Tax Considerations on Pension Death Benefits

In addition to inheritance tax, your beneficiaries may face income tax:

• If you die before age 75, pension withdrawals are tax-free for your beneficiaries.
• If you die after age 75, withdrawals are taxed at your beneficiaries’ marginal rate (up to 45%).
• If the death benefits are taken as a lump sum, anything over £1,073,100 may also be subject to additional tax, regardless of age at death.

---

🧾 Calculating Your IHT Exposure

Your total taxable estate includes:

• Property (UK and overseas)
• Bank accounts
• Investments
• Jewellery, vehicles, artwork, household items
• Insurance policies not held in trust
• And from 2027, pensions

The standard nil-rate band is £325,000. If your main home is left to direct descendants, an additional £175,000 residential nil-rate band may apply. Unused allowances may be transferred between spouses, offering a potential £1,000,000 combined threshold.

However, these thresholds are frozen until at least 2030, so as asset values rise with inflation, more families will be drawn into the IHT net.

---

🌍 Post-Domicile Reforms: Good News for Some Expats

The recent abolition of the UK domicile regime has introduced greater clarity — and, for many expatriates, a welcome outcome. Under the new long-term residence rules, UK IHT applies only to UK-situated assets for those no longer UK-domiciled.

But crucially, UK pensions remain UK assets — and will now form part of your taxable estate from 2027.

---

🛡️ What Can You Do?

Every family’s situation is different. Your planning strategy should consider:

• Type of pension and flexibility
• Jurisdiction of residence
• Other assets (UK and abroad)
• Your risk appetite, goals, and retirement timeline
• Potential to transfer pensions overseas (e.g. QROPS or QNUPS options, where suitable)

It’s also important to balance tax planning with your need for income security in retirement. Transferring or restructuring pensions is complex, and may have other implications — professional advice is essential.

⏳ Act early — it can take months to secure HMRC forms, apply for a Non-Taxable (NT) tax code, or complete necessary documentation.

---

✅ Key Actions to Consider

• Assess your exposure under the 2027 rules
• Explore options to mitigate IHT using legitimate planning tools
• Ensure your pension beneficiary nominations are up to date
• Consider using trusts or tax-efficient wrappers for non-pension assets
• Speak to a cross-border financial planner with expertise in both UK and local tax law

---

Final Thought: Don’t Wait Until It’s Too Late

April 2027 may seem far away — but when it comes to pensions, estate planning, and international tax strategy, time moves quickly.

By planning now, you can protect your family, reduce their future tax burden, and ensure your hard-earned wealth is passed on efficiently and according to your wishes.

---

📞 Speak to an adviser
Blacktower’s international team is on hand to help you understand your options and take informed action. We provide regulated, personalised advice on UK pensions, tax, and estate planning for expatriates across Europe and beyond.

---