What the Inheritance Tax rule change for pensions could mean for UK expats

When a piece of financial legislation changes, it’s vital to understand how this might affect planning for the future.

One significant change that’s recently completed the consultation period is the alteration of the UK’s Inheritance Tax (IHT) rules regarding pensions.

Previously, pension funds were typically excluded from your estate for IHT purposes, allowing you to accumulate wealth within your retirement fund and potentially pass it on to your beneficiaries without incurring IHT.

In the run-up to the Autumn Budget in late 2024, the new chancellor, Rachel Reeves, stated that she would have to take certain measures to fill in the £40 billion “black hole” in public finances.

One of her Budget announcements was that, from April 2027, unused pension funds will be included in your estate when calculating IHT after you pass away.

As you can imagine, this will considerably affect how you plan for retirement, especially if you’re an expat. So, continue reading to discover what this change might mean for expats returning to the UK and some strategies to manage it.

Overseas pensions schemes are also affected by the changes in the Budget

If you’re an expat, there’s a chance you may be relying on several pension schemes to fund your future lifestyle. This could include “qualifying recognised overseas pension schemes” (QROPSs).

QROPSs are essentially overseas pension schemes that enable you to transfer any UK pension benefits abroad without incurring unauthorised payment charges.

Typically, this form of pension fell outside of IHT rules in the UK. However, with the upcoming changes, this might shift.

Indeed, from April 2027, any wealth you hold within a QROPS may no longer be exempt from IHT in the UK.

As a result, the value of your overseas pension schemes could be subject to the 40% rate of IHT when you pass away, significantly reducing the amount your beneficiaries can inherit from your estate.

The Budget introduced several tax incentives for expats returning to the UK

Thankfully, several key tax benefits were announced in the Budget that could help you if you’re planning on returning to the UK at some point.

One of these is the four years of tax-free foreign income and gains. If you’re a non-UK long-term resident (LTR) returning to the UK, you may be able to benefit from tax-free treatment on any income and gains from overseas assets for up to four years.

This could give you a much-needed period of respite from tax as soon as you return to the UK and the chance to get your affairs in order.

You could also take advantage of the 10-year IHT exemption. Under these rules, you could benefit from a 10-year IHT exemption on any non-UK assets, provided that you remain classified as a non-UK LTR at the date of your passing.

Just note that after these 10 years, the full UK LTR status will apply once again, which will reinstate any IHT liability on estates across the world.

Read more: Non-dom changes – 4 financial factors to consider if you’re planning to leave the UK

Ultimately, these incentives could help to ease the transition if you’re an expat returning to the UK. But, as you can imagine, they will also require some careful planning to ensure that you maximise the benefits and minimise your tax liabilities, so it’s worth speaking to a financial planner who specialises in expat wealth.

You could make use of the “seven-year rule” if you’re planning to return to the UK

There’s a chance you may have heard of the “seven-year rule” when it comes to planning for an inheritance.

Typically, if you gift UK assets within your lifetime and pass away within three years of making the gift, this would be taxed at the standard 40% rate of IHT.

Meanwhile, if you pass away within three to seven years, the rate of IHT you pay may be measured on a sliding scale known as “taper relief”. The table below shows the different rates of IHT your beneficiaries might pay depending on how long you survive after making a gift:

If you’re a non-UK LTR and gift a non-UK asset, the gift is typically exempt from IHT in the UK with no seven-year waiting period.

What’s more, if you eventually do return to the UK, this gift would still not be counted as part of your estate for IHT purposes, even if you do pass away within seven years of making it.

Just remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

You may want to consider transferring your pension for more flexibility

Since so much was changed by the Autumn Budget regarding your pension, it’s vital to carefully consider your planning. If you’re looking for a more flexible approach, you may want to consider transferring your pension.

An international self-invested personal pension (SIPP) could be a wise option if you wish to consolidate your retirement wealth under one roof. This is because they typically allow you to hold your funds in major foreign currencies.

Just be aware that if you are considering consolidation in an international SIPP, it’s essential to take professional advice, as transferring might mean you give up valuable benefits from your old provider.

Meanwhile, a QROPS could allow you to transfer your pension overseas, which could be beneficial if you’re planning on retiring abroad.

Ultimately, speaking to a financial planner who is experienced in all things expat could help you devise a pension strategy tailored to your needs, allowing you to protect your retirement savings and pass on your wealth as tax-efficiently as possible.

Get in touch

To find out how we could help you, please email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

The Financial Conduct Authority does not regulate estate planning or tax planning.

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