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

There’s a significant change coming for UK pensions that could quietly impact your estate if you’re not prepared. From April 2027, pensions that were once largely tax-free for inheritance purposes will fall squarely within the inheritance tax net. For British expatriates, this is more than a policy update, it affects how you plan your legacy, preserve wealth, and consider your future residency.

Even if it feels far off, the reality is that acting early gives you options. Waiting until the last moment often leaves families with little choice and a potentially heavy tax burden.

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 That assumption is becoming outdated.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 is not a call for panic, it is a call to act. Financial planning now allows you to rethink how your pension fits into long-term estate planning. Strategies may include drawing more from your pension during your lifetime, using funds for tax-free gifts, transferring assets to a spouse, or restructuring pensions through international jurisdictions or specialist trusts.

There is no one-size-fits-all solution, but waiting until 2027 risks leaving significant wealth untapped.

What You Can Do Today

The first step is a clear, honest view of your full financial picture. This includes reviewing your UK pension arrangements, assessing your past and current UK residency, understanding your estate size, clarifying your intentions regarding returning to the UK, and identifying your beneficiaries and their tax positions.

With this clarity, it becomes possible to design a strategy that protects your estate, safeguards your loved ones, and makes the most of the time before the new rules take effect.

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.