Pensions have long been used as an efficient way to pass on wealth across generations, as they have historically been exempt from Inheritance Tax (IHT) in the United Kingdom.
Because of their favourable IHT treatment, making additional pension contributions used to be common practice to help improve the efficiency of an estate.
However, the rules regarding pensions and IHT are set to change next year, and the government estimates around 50,000 estates will be affected, including many expats.
Read on to find out what the new rules entail and how they could affect expats.
Pensions are set to be liable for Inheritance Tax from April 2027
From 6 April 2027, any inherited pensions will be liable for IHT.
This means your pension may be subject to the standard 40% IHT rate if your estate exceeds the available nil-rate bands.
The nil-rate bands are currently set to be frozen until April 2031 at the following thresholds:
- £325,000 for the standard nil-rate band – This is available to everyone.
- £175,000 for the residence nil-rate band – This is available if you leave your main residence to your direct descendants, but it tapers for estates worth over £2 million.
Spousal exemptions remain in place, so if you pass on your pension to your surviving spouse or civil partner, it typically won’t be charged IHT.
Moreover, as with the current rules, if you die after age 75, your beneficiaries might also face Income Tax at their marginal rate. This means they could pay both IHT and Income Tax on the inherited pension, potentially resulting in a loss of up to 85%.
However, it’s important to note that the full details have yet to be finalised and remain under review.
Expats’ pensions may also be subject to the same rules
If you live abroad and have a UK pension, you may be subject to the new rules if you’re considered a UK long-term resident (LTR) and your estate exceeds the nil-rate bands.
You are considered an LTR if you have been a UK tax resident for either 10 consecutive years or for at least 10 of the 20 tax years immediately before your death.
Even if you aren’t considered an LTR and have been or intend to be a non-UK resident for 10 consecutive years, your UK pension may still be charged IHT because it is a UK-based arrangement.
5 strategies that can help keep your pension efficient under the new rules
The following strategies can help you efficiently pass on your pension under the new rules. As ever, it’s important to speak to a financial planner before making any changes to your estate plan.
1. Maximise your nil-rate bands
Making full use of your nil-rate bands is one of the simplest ways to reduce IHT on your estate, including your pension.
If you maximise your allowances, you can pass on up to £500,000 IHT-free, and when you combine spousal allowances, you can collectively pass on up to £1 million.
So, it’s a good idea to explore how the new rules around pensions and IHT will affect your allowances, and to make any necessary changes to your estate plan to ensure you maximise them.
2. Reduce exposure to UK-situs assets where possible
For expats who qualify as non-long-term UK residents, one of the most effective planning strategies can be to reduce exposure to UK-situs assets.
This might involve restructuring assets that do not necessarily need to remain in the UK, such as cash savings, investment portfolios, or proceeds from the sale of UK property, into suitable overseas structures.
By reducing the amount of wealth held within UK-based arrangements, expats can significantly reduce the portion of their estate potentially exposed to UK IHT. In some cases, this could even reduce the estate below the available nil-rate bands entirely.
Given the continuing changes to UK residency and IHT rules for expats, it is important to ensure any planning remains suitable for your personal circumstances and long-term objectives.
3. Review whether your pension structure remains suitable if living abroad
Many people continue holding their pensions within traditional UK-based arrangements long after leaving the UK, without reviewing whether the structure remains appropriate for their long-term residency and succession goals.
In some cases, retaining pensions within a standard UK arrangement may still be suitable. However, for long-term expats, reviewing whether a more internationally focused structure – such as a non-resident or International SIPP, or an overseas pension arrangement – may be more appropriate and can create significant planning advantages.
Depending on your residency status, future intentions, and wider estate position, benefits can include:
- Improved flexibility for international residents
- More suitable cross-border administration and currency options
- Greater flexibility for overseas withdrawals and income payments
- Enhanced succession planning opportunities
- Greater control over beneficiary planning
- Potential mitigation of UK IHT exposure
- Reduced exposure to future UK legislative changes
- The ability to structure surrounding non-UK assets more efficiently
- The ability for a local/overseas adviser to manage and advise your pension(s)
For some expats, wider planning may also involve restructuring UK-situs assets and internationalising wealth outside the UK system, particularly following the UK’s move toward a residence-based IHT regime.
These areas largely depend on residency, domicile status, treaty position, and future intentions, so professional advice should always be sought before making any changes.
4. Use gifting as part of your estate planning strategy
Another simple way to reduce potential IHT on your pension is to gift it during your lifetime.
Any gifts you give are typically not considered part of your estate, provided you survive seven years after giving them.
If you die within seven years, the gift from your pension may be liable for IHT, unless it falls within certain allowances, including:
- The £3,000 annual gifting exemption – You can also carry forward unused allowances for one year and combine your allowance with that of your spouse or civil partner.
- Wedding gifts of up to £5,000 – The exact amount you can give depends on your relationship to the recipient.
- Small gifts of £250 – You can give as many of these as you want, provided they don’t form part of a bigger gift.
- Gifts from surplus income – You can give regular gifts from your income (including pension income), as long as they don’t adversely affect your standard of living.
A financial planner can help you develop a gifting strategy that balances your retirement income needs with passing on your pension efficiently.
5. Explore Business Relief schemes
Business Relief (BR) allows you to claim up to 100% IHT relief on certain assets, including shares in certain companies, provided you’ve held them for at least two years before you die.
This means you can use your pension to invest in BR schemes that can then be passed on with IHT relief.
However, BR investments can also be risky, so it is a good idea to consult a financial planner to help decide if this strategy is appropriate for you.
Get in touch
To find out more about how we can help you keep your pension(s) efficient in light of the upcoming changes, get in touch.
Email contact@ambient-wm.com or call us on +34 658 077 450.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.