UK Pensions and Inheritance Tax: What Every British Expat Needs to Know

Starting April 2027, one of the last major shelters from UK inheritance tax disappears: pensions. Funds that could previously be passed down largely tax-free will now be pulled squarely into the inheritance tax net. For British expatriates, this isn’t just a technical adjustment - it’s a seismic change that could see 40% of pension wealth lost to HMRC instead of your family.

Acting early is critical. With the right planning, expats still have time to protect their estates and preserve wealth for future generations. Waiting until the deadline approaches, however, may leave families facing limited options and significant tax bills.

Understanding the Change

At present, if you die before the age of 75, UK defined contribution pensions can pass to your chosen beneficiaries without triggering income or inheritance tax. After 75, only income tax typically applies on withdrawals, and inheritance tax does not. This has quietly allowed many individuals to use pensions as a highly effective tool for intergenerational wealth transfer.

From 6 April 2027, however, all unused pension funds will be included in your estate for inheritance tax purposes, regardless of age at death. Estates exceeding the combined nil-rate bands, currently £325,000 for the general allowance plus £175,000 for the residence nil-rate band, may face the standard 40% inheritance tax. Spouses and civil partners still benefit from exemptions, but children, grandchildren, and other non-spousal beneficiaries could face substantial bills. On top of this, income tax may still apply when they draw from the inherited pension, creating a double tax exposure.

Residency No Longer Provides Complete Protection

Many expats assume that living outside the UK shields them from inheritance tax. That assumption is becoming outdated.

The UK’s residence-based inheritance tax regime, introduced in April 2025, considers your residency over the last 20 years. If you have been a UK tax resident for 10 out of the last 20 years, your worldwide estate, including pensions, remains subject to UK inheritance tax.

For example, a British expatriate who moved to the UAE in 2017 and plans to stay until 2026 would still fall within the rules in 2027. Even short periods back in the UK can reset the clock, bringing your estate back within HMRC’s reach.

Real-Life Examples

Consider Sarah, a 69-year-old living in Dubai with a £900,000 SIPP. She assumes her estate is outside the UK tax net, but under the 10/20 rule, her children could face an inheritance tax bill of approximately £230,000, before paying income tax on withdrawals.

Or James, 63, who has lived overseas for 17 years but plans to return to the UK. His £700,000 pension, combined with property and other savings, could see a combined estate tax exposure exceeding £300,000.

These situations are not hypothetical. Many British expats in the Gulf believe they are protected, when in fact, their estates are fully exposed.

Why Planning Early Matters

This isn’t a call for panic, but it is a call to act. From 2027, pensions shift from being one of the most effective tools for passing wealth tax-free to a potential liability. The sooner you plan, the more options you have to protect your estate and preserve your legacy. Leaving it late often means fewer choices and a heavier tax burden for your family.

What You Can Do Today

Now is the time to look carefully at how your pension fits into your broader estate planning. That means reviewing your estate plan and understanding how the new rules could affect the size of your taxable estate. For some, it may make sense to start accessing pension wealth earlier, or reallocating funds to reduce exposure. For others, updating wills and beneficiary nominations will be essential to make sure their intentions are carried out effectively. Families whose wealth is tied up in pensions or property should also think about how any tax bill will be paid in practice, whether through cash reserves or life cover. And for British expats, seeking advice on residency and cross-border pension structures is increasingly important, since living abroad no longer guarantees protection from UK inheritance tax.

The Bottom Line

From April 2027, pensions will no longer be immune to inheritance tax. For British expatriates in the UAE, the planning window is closing, but it has not closed entirely. Acting now can significantly reduce the risk to your estate and maximise the wealth passed to your family.

Let’s Talk While Time Is Still on Your Side

As a Chartered Financial Planner living and working in the UAE, I specialise in helping British expatriates manage the intersection of UK rules and expat realities. If you have a UK pension and want to ensure your wealth reaches your family, book a confidential, no-obligation review today. Together, we can assess your residency, pension structures, and legacy goals, and create a strategy that is both compliant and effective.