UK Pensions and Inheritance Tax When You Live Abroad: The April 2027 Change

Yes, from 6 April 2027 it can. If you die on or after that date holding unused funds in a UK registered pension, those funds will be included in your estate for UK inheritance tax whether you live in Dubai, Sydney or Lisbon. Until then, for deaths before 6 April 2027, most defined contribution funds held under discretionary disposal sit outside the estate, which is exactly why pensions have been used as a wealth transfer wrapper; that older treatment continues to apply to a pre-April 2027 death even if the benefits are paid out afterwards. HMRC says the reform is intended to remove that distortion.

To see why non-residents are caught, you need the shape of the residence-based IHT rules that took effect on 6 April 2025. UK inheritance tax now asks two questions. First, are you a long-term UK resident, broadly someone who has been UK tax resident for at least 10 of the previous 20 tax years? If so, your worldwide estate is in scope. Second, if you are not a long-term UK resident, your UK assets remain in scope anyway.

HMRC's technical note applies the same logic to pensions. For people who are not long-term UK residents, inheritance tax arises on unused pension funds held in a registered pension scheme, a qualifying non-UK pension scheme or a section 615(3) scheme that is established in the UK. Your SIPP is established in the UK. Changing your own residence does not change that.

Finance Act 2026 amends the Inheritance Tax Act 1984 so that, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits are treated as an asset of the deceased's estate. HMRC calls this asset notional pension property. It is valued at death and taxed alongside everything else you own; there is no separate nil rate band for pensions, so the ordinary £325,000 nil rate band has to stretch across the whole estate.

Some benefits are excluded from the new charge:

• Dependants' scheme pensions, the ongoing income typically paid from defined benefit schemes after a member's death
• Death in service benefits payable because the member was in employment, or other qualifying work, immediately before death
• Joint life annuities, meaning a dependants' or nominees' annuity purchased together with the member's own lifetime annuity that simply continues to a survivor
• Trivial commutation lump sums that replace a beneficiary's entitlement to a dependants' scheme pension

Payments to charity are dealt with differently but usually end up tax free too: charity lump sum death benefits are not on the excluded list, but the ordinary inheritance tax charity exemption covers amounts passing to qualifying charities, and HMRC confirms these lump sums stay free of income tax even where the member died at or after 75.

The mechanics matter for expat families. Personal representatives are responsible for reporting and liable for paying any inheritance tax due on the pension, and once benefits vest in a beneficiary that person becomes jointly and severally liable with them. Pension scheme administrators are normally not liable, unless they fail to action a valid withholding or payment notice. Executors dealing with HMRC from overseas, often alongside a foreign probate process, will need to coordinate carefully and early.

Many expats have understood the post-2025 rules as a ten-year escape plan: leave the UK, sit out the long-term resident tail of between 3 and 10 tax years depending on how long you lived in the UK, and your non-UK estate falls out of the inheritance tax net. That is broadly right for foreign assets. You can check your own position with our IHT tail calculator.

The pension is different. Even after you stop being a long-term UK resident, HMRC's technical note is explicit that inheritance tax still arises on notional pension property in any scheme established in the UK. A SIPP, a UK personal pension and a UK occupational scheme are all established in the UK. They do not emigrate with you, and there is no residence-based sunset for them. The only pensions outside the net for a non-long-term UK resident are schemes established outside the UK.

Be equally careful with structures promoted as solutions. The technical note states that notional pension property held within qualifying non-UK pension schemes and section 615(3) schemes will be in scope for inheritance tax. A QNUPS established outside the UK only escapes once you are no longer a long-term UK resident, and a UK-established QNUPS or section 615(3) scheme does not escape at all. Anyone selling either as an IHT shelter should be asked to evidence precisely why their arrangement works under the enacted legislation.

Most UK estates rely on the unlimited spouse exemption. Under the residence-based rules it is only unlimited where the receiving spouse or civil partner is themselves a long-term UK resident. If your widow or widower is not, the exemption is capped at £325,000, and that cap is a cumulative lifetime limit across everything you have ever passed to them, not a per-gift allowance.

This bites hard on couples abroad. Suppose one spouse dies while still within the long-term resident tail, or simply holding a UK SIPP and a UK property. Those assets are chargeable, and if the survivor is not a long-term UK resident the estate gets only the £325,000 nil rate band plus the capped £325,000 spouse exemption before the 40 per cent charge starts. A pension pot on its own can exhaust both.

There is a fix, but it has teeth. The surviving spouse can elect to be treated as a long-term UK resident, restoring the unlimited exemption. The price is that their own worldwide estate comes within UK inheritance tax. The election cannot be revoked once made, and it only falls away after a sustained run of non-UK residence, broadly 10 consecutive tax years under the current rules. It mirrors the old non-dom spouse election and needs proper modelling before anyone signs it.

Inheritance tax is only half the story, because the income tax treatment of inherited pensions continues alongside it. If you die before age 75, your beneficiaries can usually inherit the pension free of income tax, provided lump sums stay within the lump sum and death benefit allowance, usually £1,073,100, and are paid within two years of the provider being told of the death. If you die at or after 75, beneficiaries pay income tax at their own marginal rate on everything they draw.

From April 2027 the two charges stack. The estate pays inheritance tax on the chargeable pension first, then the beneficiary pays income tax on withdrawals from what remains. In words: a pound of pension above your available allowances becomes 60 pence after 40 per cent inheritance tax, and an additional rate beneficiary keeps 55 per cent of that, around 33 pence. That is a combined effective rate of roughly 67 per cent at the extreme, and around 64 per cent for a higher rate beneficiary.

There is a cross-border layer too. A beneficiary living abroad may be taxable on the pension income in their own country instead of, or as well as, the UK, depending on the relevant double tax treaty. Whether the treaty gives sole taxing rights to their country of residence can materially change who should inherit the pension and who should inherit everything else.

There is no single right answer, and anything that saves inheritance tax usually costs something else, typically income tax today. The realistic menu looks like this:

• Accelerate drawdown. Take money out of the wrapper earlier at your marginal rates, then spend or gift it. For non-residents this can be unusually attractive: many double tax treaties give your country of residence sole taxing rights over UK pension drawdown, so the UK income tax cost may be lower than you expect. The treaty position must be checked case by case.
• Spend it. The bluntest answer, and often the right one: the pension was built to fund retirement, not to be a legacy vehicle.
• Gift during your lifetime. Outright gifts are potentially exempt transfers that leave your estate after seven years, and regular gifts out of surplus income can be immediately exempt if properly evidenced.
• Life cover written in trust. This does not reduce the charge but can fund it, keeping the pension intact for beneficiaries while the policy pays the tax. Cost and insurability depend on age and health.
• A QROPS transfer. Moving the fund to a scheme established outside the UK can eventually take it out of the net, but only once you are no longer a long-term UK resident, and the 25 per cent overseas transfer charge applies unless an exclusion covers you. The main exclusion is living in the same country as the receiving scheme, the old EEA and Gibraltar carve-out was removed for transfers from 30 October 2024, and amounts above the overseas transfer allowance, usually £1,073,100, are charged even where an exclusion applies. See our guide to foreign pensions and QROPS.
• QNUPS and section 615(3) schemes. These are being discussed in the market as workarounds, but HMRC's technical note expressly brings notional pension property in both within scope. Treat any pitch with caution and take specific advice before moving money.

The right sequence depends on your residence history, when your long-term resident tail ends, your spouse's status, your age relative to 75, the treaty where you live and what the pension is actually for. That is a modelling exercise, not a rule of thumb. Horizon UK Tax Solutions runs exactly this review for expats and non-residents: we map your tail, price the 2027 exposure on your current pot, and stress test drawdown, gifting and transfer routes against both UK and local tax. Book a pension and estate review well before April 2027, while every option is still on the table.