Pensions and inheritance tax from April 2027: what British expats need to do now

From 6 April 2027, most unused UK pension money will count towards inheritance tax when you die. For years, pensions sat largely outside the estate, which made them the natural asset to leave untouched and pass on. That is ending. If you are a British expat, living abroad does not get you out of it, and you may not even realise you are still inside the UK tax net.

Here is what is changing, who it catches, and the steps worth taking before the deadline.

What is actually changing

Today, many defined contribution pensions, such as workplace pensions, SIPPs and personal pensions, can be passed on free of inheritance tax. That is because the scheme trustees choose who receives the money at their discretion, and it is that discretion that keeps the pension out of the estate.

From 6 April 2027, the distinction goes. New section 150A of the Inheritance Tax Act 1984 treats you as owning your unused pension funds and death benefits immediately before death, so the value is added to your estate when it is worked out for inheritance tax. HMRC's own costing expects about 10,500 estates to face an inheritance tax bill in 2027–28 that would previously have had none, and a further 38,500 to pay more. Where a pension is pulled in, the average increase is around £34,000.

This is not a new tax rate. The rate stays at 40 per cent above the threshold, or 36 per cent if you leave at least 10 per cent of the net estate to charity. What changes is that the pension, often the last large asset sitting outside the estate, now joins everything else. With the nil-rate band frozen at £325,000 and the residence nil-rate band at £175,000, adding a six-figure pension to the sum is what tips many estates into a bill.

Why living abroad does not solve it

This is where expats get caught. Since 6 April 2025, UK inheritance tax no longer turns on domicile. It turns on long-term UK residence. HMRC treats you as a long-term UK resident if you were UK tax resident for the previous 10 consecutive tax years, or for at least 10 of the previous 20.

The part people miss is the tail. Long-term residence can follow you for up to 10 tax years after you leave, depending on how long you lived in the UK first. Someone who was UK resident for 15 years before leaving stays a long-term UK resident for five years after departure. So a British national who moved to Dubai, Spain or Singapore last year, and who comfortably describes themselves as non-resident, can still be inside the UK inheritance tax system. From April 2027, that includes their pension.

Where the pension scheme sits matters too. If you are still a long-term UK resident, the charge can reach worldwide schemes, including a QNUPS or a section 615(3) scheme held overseas. If you are no longer a long-term UK resident, only UK-based schemes are caught, and an overseas scheme established outside the UK falls outside UK inheritance tax. Two questions therefore decide your exposure: are you still a long-term UK resident, and where is each pension established.

One trap on the residence side: a split tax year counts as a year of UK residence for this test. If you left or returned partway through a tax year, that part-year still counts, which can move you in or out of the long-term bracket.

What stays out

Not everything is pulled in. Death-in-service benefits paid from a registered pension scheme are out of scope from April 2027, whether or not they are discretionary. Dependants' scheme pensions, certain joint-life annuities and some trivial commutation payments are also excluded. The usual exemptions still apply: anything passing to a surviving spouse or civil partner is exempt, as are gifts to charity. So a pension can be inside your estate for the calculation and still produce no tax if it goes to your spouse.

There is a separate income tax point to hold in mind. If you die before 75, pension death benefits can often be paid free of income tax, within the lump sum and death benefit allowance. Die at 75 or over, and the benefits are taxable as the beneficiary's income. From 2027 that income tax position continues and the inheritance tax charge can apply to the same pot, so the same money can be touched twice. The government has drafted rules to soften the worst of that in some lump-sum cases, but it does not remove it.

Who pays, and the cash-flow problem

From April 2027, your executors, not the pension scheme, are responsible for reporting and paying the inheritance tax on the pension. Pension beneficiaries become jointly liable once they receive the money. Inheritance tax is still due by the end of the sixth month after death, with interest charged after that.

For a cross-border estate this creates a real liquidity risk. Executors can instruct a UK registered scheme to hold back up to half the benefits to help fund the tax, but that mechanism does not apply to a QNUPS or a section 615(3) scheme. If most of the wealth is locked in an overseas pension, the family may have to find the tax from other assets first. That is a good reason to make sure there is some cash outside the pension.

A worked example

David moved from London to Spain in 2024 after 18 years of UK residence. He dies in late 2027 with a £900,000 SIPP, £300,000 of UK savings and investments, and a Spanish home. Because of his residence history he is still a long-term UK resident, so his worldwide estate, including the SIPP, is in scope.

Under the old logic, the family might have expected the £900,000 pension to sit outside the estate. From 2027 it does not. Setting aside the residence nil-rate band and any foreign credits for simplicity, his taxable base rises from £700,000 to £1.6 million. At 40 per cent, that is up to £360,000 of extra exposure created by the reform, before exemptions or Spanish tax credits. Spain is not on the UK's short list of inheritance tax treaties, so relief cannot be assumed and has to be worked through. The pension stops being the protected family reserve and becomes the thing that pushes the estate well past the thresholds.

Sarah's position is different but just as easy to misread. She left the UK in 2026 to work in Dubai and plans to return in a few years. She feels non-resident, and for income tax she is. But her split year still counts, her residence history still follows her, and her £900,000 of UK pensions are inside the UK calculation from April 2027 unless she plans for it.

What to do before April 2027

Work out your residence position first. Reconstruct your UK tax residence year by year and check whether you are still a long-term UK resident, including any split years. This one answer decides whether your worldwide pensions are exposed or only your UK ones.

Map your pensions. List every scheme, its provider, its type, and where it is established. Old UK workplace pensions and any overseas arrangements all count. Your executors will have to contact each one for date-of-death values, so the list helps you and them.

Check your beneficiary nominations. The expression-of-wish form tells the scheme who should receive the money, and it needs to be current after any marriage, divorce or new child. From 2027 it does more than name a recipient. It shapes which exemptions apply and how cleanly the tax can be handled.

Coordinate the pension with your will. A pension usually passes under the scheme's rules and your nomination, not your will. The will still governs the rest of the estate, the spouse and charity planning, and who carries the administration. Treat the will, the pension nomination and any local will in your country of residence as one plan, not three separate ones.

Then revisit your drawdown strategy and use the exemptions that still work: spouse, charity, and lifetime giving within the £3,000 annual exemption and the seven-year rule. The old default of spending other money first and keeping the pension as a tax-free inheritance no longer holds as neatly.

The short version

From April 2027, your pension is part of your estate plan, not a separate world. For expats, the deciding factors are your long-term UK residence and where each scheme sits. Living abroad does not fix it, and a will that has not been looked at alongside your pensions is a gap worth closing before the deadline.

Sources

• Draft legislation inserting section 150A into the Inheritance Tax Act 1984 (gov.uk)
• Inheritance Tax on unused pension funds and death benefits, policy paper (gov.uk)
• Inheritance Tax overview (gov.uk)
• Inheritance Tax if you are a long-term UK resident (gov.uk)
• HMRC Inheritance Tax Manual IHTM47020, long-term UK residence test (gov.uk)
• Inheritance Tax on unused pension funds and death benefits, policy paper (gov.uk)
• Pay your Inheritance Tax (gov.uk)
• Inheritance Tax: Double Taxation Relief (gov.uk)
• Inheritance Tax: gifts (gov.uk)

This is general information, not tax or legal advice. Your position depends on your own residence history and pensions, and a cross-border estate is worth taking proper advice on. Expat Legacy can prepare your UK will from anywhere in the world, so the will side of the plan is in place and works with the rest.