New Pension Inheritance Tax Rules: What Expats Must Know

If you’re a long-term British expat with pensions in the UK, there are major new pension IHT rules on the horizon that could impact how much of your wealth your loved ones will inherit.

From April 2027, the UK government is introducing new pension inheritance tax rules, and while they’ve been in the works for a while, the implications are only now becoming clear.

This change could affect thousands of families, particularly those with larger pension pots or more complex estates.

Here’s what’s changing, why it matters for expats, and what you can do to protect your legacy.

What Are the Current Pension IHT Rules?

At present, pensions are one of the most inheritance-tax-friendly assets you can own:

If you die before age 75, your pension can usually be passed on completely tax-free.
If you die after age 75, your beneficiaries pay income tax on the funds they withdraw, but no inheritance tax is due.

Crucially, pensions sit outside your estate for inheritance tax (IHT) purposes, meaning they’re not included when calculating the 40% IHT charge.

For wealthier families, including expats who’ve built up sizeable pots before moving abroad, this has made pensions an efficient way to pass on wealth across generations.

>>> Fun Quiz: How 'Return Home Ready' Are You? Click here to find out.

What’s Changing?

From April 2027, the UK government plans to include unused defined contribution pension pots as part of your estate for IHT purposes.

This means:

If your estate (including your pension) exceeds the £325,000 nil-rate band, the excess could be taxed at 40%.
This applies primarily to defined contribution pensions (such as personal pensions and SIPPs), not defined benefit/final salary pensions.
Spousal exemptions still apply, so if your pension goes directly to a spouse or civil partner, no IHT will be charged.

The government says this change is designed to stop pensions being used purely as inheritance vehicles, rather than for funding retirement, something that has become increasingly common since the introduction of pension freedoms in 2015.

Why Does This Matter for Expats?

For British expats who are close to retirement, especially those returning to the UK, this change could have serious consequences:

Many expats hold large UK pension pots, often left untouched in retirement.
Those pots could now face a 40% IHT charge, simply for not being spent.
If your total assets subject to IHT exceed £2 million, you may also lose access to the additional residence nil-rate band, making the IHT hit even bigger.

In short, pensions will no longer be a safe, tax-sheltered way to pass wealth to the next generation.

Case Study: How the New Pension IHT Rules Could Impact Chris and Sue in Dubai

Chris and Sue are both 57-year-old British citizens who have spent the last 18 years living and working in Dubai.

With retirement now just a few years away, they’re planning to return to the UK at age 60 to settle near their two grown-up children; one still at university, and the other just starting their first job.

Over the years, Chris and Sue have built up the following assets:

A property in the UK worth £850,000
£1,250,000 in savings and investments
Two defined contribution pensions in Chris’s name, together worth £800,000

Their Original Plan

Chris and Sue had intended to:

Live off their savings and investments in retirement
Leave most of Chris’s pension untouched and pass the funds on to their children, inheritance tax-free

That strategy worked well under the current rules, but the new pension IHT rules mean this could now result in a large tax bill.

What the Changes Mean for Them

With a total estate of £2.9 million, they exceed the £2 million threshold at which the residence nil-rate band starts to taper away.

If Chris were to die after age 75, the entire £800,000 pension could face:

40% IHT (£320,000)
Income tax when their children withdraw funds, potentially at 40%

This could reduce the value of the inherited pension to just £288,000, or even less, leaving their children with less than 40p in the pound.

How They Can Reduce the Tax Burden

Fortunately, living in Dubai gives Chris and Sue an opportunity.

Draw down from the pension while still living in Dubai
- Dubai doesn’t levy income tax
- The UK-Dubai tax treaty prevents UK income tax from applying
- Chris could withdraw 100% of his pension funds, completely tax-free
Use withdrawn pension funds to support retirement and gift to children
- Gifting while alive (within UK gifting rules) can reduce the size of their estate
- They can still live comfortably in retirement while minimising IHT exposure

Chris and Sue’s case shows how expats can still take advantage of favourable tax rules — but only if they act before returning to the UK.

🔗 Expert Financial Advice for British Expats Returning to the UK

Could Your Family Face 80%+ Tax on Inherited Pensions?

Shockingly, in extreme cases, yes.

If you die after 75, and your pension is taxed as part of your estate and your beneficiary pays income tax on withdrawals, the combined tax rate can exceed 80%.

In very large estates, this could lead to an effective tax rate of up to 87% on pension assets.

The Pension IHT Taper Trap

If the total value of what you own is more than £1 million, leaving behind a £500,000 pension could result in your family paying around £200,000 in inheritance tax.

And if your estate is even bigger, the tax hit could be much worse.

Here’s why: once your estate goes over £2 million, you start to lose a valuable inheritance tax allowance that helps protect your home’s value, called the Residence Nil Rate Band.

When that’s lost, and inheritance tax is applied to your pension, plus income tax when your children withdraw the money, the total tax bill can be enormous.

In fact, in extreme cases, your family might only end up with £20 out of every £100 in your pension, with the rest going to the taxman.

What Happens if My Children Live Outside the UK

If you die after 75 and your children inherit your pension, they may be taxed twice:

UK inheritance tax on the pension itself
Local income tax in their country of residence when they withdraw the funds

Depending on the jurisdiction, double tax treaties may not eliminate this completely.

Poll

Who Will Be Affected?

✅ Not affected:

Final salary (defined benefit) pensions
Pensions left to a spouse or civil partner
Death-in-service benefits and joint annuities

❌ Potentially affected:

Defined contribution pensions passed to children
Estates worth more than £1 million (especially above £2 million)
Expats planning to return to the UK with unused pension pots

What Can You Do to Prepare?

Here are six practical steps you can take now to limit the impact of the new pension IHT rules:

💡 Review Your Pension Nominations

Ensure your expression of wishes is up to date.

Nominating a spouse or civil partner remains the most IHT-efficient option.

💡 Draw From Your Pension While Living Abroad

If you’re in a tax-free country like Dubai or Saudi Arabia, consider drawing down your pension before returning to the UK.

Under the UK’s tax treaty with these countries, no UK income tax applies, meaning you can draw funds tax-free, reduce your pension value, and lower future IHT exposure.

🔗 Moving Back to the UK from Saudi Arabia

💡 Reorder Your Retirement Income Strategy

Rather than spending ISAs or general investments first, consider using pension income earlier.

This preserves assets that are either already within the estate or more favourable for inheritance purposes.

💡 Structure Large Estates Carefully

If your estate is over £2 million, explore:

Charitable donations (which may reduce the IHT rate from 40% to 36%)
Gifting strategies
Use of trusts and lifetime transfers

💡 Make Use of Gifting Rules

Regular gifts from income or larger gifts under the 7-year rule can reduce your taxable estate.

Just ensure these are documented and compliant.

🔗 Lifetime gifts and Inheritance Tax: How to notify HMRC

💡 Get Professional Cross-Border Advice

These rule changes are complex, and the international angle adds another layer.

A cross-border financial adviser can help you create a retirement and estate plan that fits your unique goals and residency path.

Frequently Asked Questions (FAQs) About the New Pension IHT Rules

1. Is my pension included in inheritance tax?

From April 2027, unused defined contribution pensions may be included in your estate and subject to IHT if passed to non-spouse beneficiaries.

2. Will I avoid inheritance tax on my UK pension if I live abroad?

Not automatically. Your UK pension could still face IHT. However, living abroad may offer planning opportunities before returning to the UK.

3. How can I avoid paying inheritance tax on my pension?

Possible strategies include drawing down your pension tax-free while living abroad, gifting withdrawn funds, leaving it to a spouse or charity, or keeping your estate under the IHT threshold.

4. Are pensions exempt from IHT?

Currently, most defined contribution pensions are outside of IHT. From 2027, this will change for many people, especially those with large, untouched pension pots.

5. What are the new pension IHT rules?

From April 2027, unused pensions will count toward your estate. If your estate exceeds the nil-rate bands, a 40% IHT charge may apply to your pension funds.

6. Can I draw my pension tax free if I live in Dubai or Saudi Arabia and avoid the new pension IHT rules?

Yes. Both countries have no local income tax and the UK has tax treaties with each. This means you can draw pension income tax-free while resident there, reducing your future IHT liability.

7. What happens if I die after 75 with a UK pension?

Your beneficiaries may owe income tax on withdrawals, and from 2027, the unused pension may also face inheritance tax.

8. Can I use my pension to reduce my inheritance tax bill?

Yes. While pensions will be less tax-efficient, drawing down earlier and gifting can help reduce your estate over time.

9. Does the new pension IHT rule apply to final salary pensions?

No. Final salary pensions pay a survivor’s income and are not inherited in the same way, so they are unaffected.

10. What should I do now to prepare for the pension inheritance tax changes?

Review your pension and estate plan, act early if you live abroad, and get professional cross-border advice.

Final Thoughts

The new pension IHT rules, set to come in from April 2027, represent a seismic shift for British expats, especially those planning to retire back in the UK.

The sooner you plan, the more flexibility you’ll have to protect your pension and secure your legacy.

Need help reviewing your pension or estate strategy? I specialise in cross-border retirement planning for British expats. Feel free to get in touch for a confidential, no-obligation consultation.

Talk to an Expert

Ross is a qualified Chartered Financial Planner and Pension Transfer Specialist.

He has been a cross-border financial adviser for 25 years and specialises in helping British expats manage their finances with clarity and peace of mind.

If you would like to have a no strings chat with him, please get in touch.

Contact Ross

Are UK Pensions Now Liable for Inheritance Tax? The New Pension IHT Rules Unpacked