Resources & Insights

Inheritance Tax and Pensions: 2025 Changes Explained

By QROP Direct Editorial Team · Reviewed by an independent regulated pension specialist · Reviewed 2026-06-10

Inheritance Tax and Pensions: 2025 Changes Explained

The Autumn Budget 2024 announced one of the most significant changes to pension taxation in a generation: from April 2027, pension death benefits will be brought within the inheritance tax framework. For UK expats who have structured their pension savings partly as an IHT-efficient wealth transfer vehicle, this requires urgent reassessment.

This guide explains the current position, the announced changes, and the planning implications for UK expats.

This guide is for information purposes only and does not constitute financial, tax or legal advice. The legislative detail of the 2027 IHT changes is still being confirmed. Consult a regulated adviser before making any planning decisions based on the changes.

Key Takeaways

• Current position: Pensions are generally outside the estate for IHT — a major planning advantage
• From April 2027: Pension death benefits will be within the IHT framework (subject to final legislation)
• Implication: Large pensions accumulated primarily as IHT-exempt legacies need to be reviewed
• Planning actions: Drawing down and gifting, reviewing nominations, and considering IHT-efficient alternative structures
• Non-domicile expats: May have additional considerations depending on domicile status and treaty provisions
• Final legislation pending: Consult an adviser as details are confirmed

The Current Position: Why Pensions Have Been IHT-Efficient

Currently, UK pension funds are held within a trust structure. On death, the pension trustees exercise their discretion to pay out death benefits to nominated beneficiaries. Because the payment is made at the trustees' discretion (not automatically to the estate), the pension fund does not form part of the deceased's estate for IHT purposes.

This means:

• A pension pot of £1,000,000 can currently pass to nominated beneficiaries with no IHT charge, even if the deceased's estate is substantially above the nil rate band
• The 40% IHT charge that applies to estate assets above £325,000 (£500,000 with the full residence nil rate band) does not apply to pension death benefits

For high earners who have maximised pension contributions over a career, the pension can represent the largest single asset in terms of wealth transfer efficiency. A person with a £2,000,000 pension and £500,000 in other assets might leave over £2,000,000 to beneficiaries free of IHT.

This efficiency was well-understood by financial planners, who have for years recommended drawing on non-pension assets first in retirement to preserve the IHT-exempt pension for beneficiaries.

The Announced Changes from April 2027

The Autumn Budget 2024 announced that pension death benefits will be included within the IHT framework from April 2027 (Source: HM Treasury, Autumn Budget 2024, gov.uk, 2024).

The core principle of the change:

Pension funds will be treated as part of the estate for IHT purposes on the member's death — meaning the 40% IHT rate will apply to pension death benefits that cause the total estate (including the pension) to exceed the available nil rate bands.

Implementation Detail (Subject to Confirmation)

The precise mechanism is subject to legislation and consultation that is still being finalised as of 2026. Key implementation questions include:

1. How will pension trustees interact with the IHT calculation? Pension trustees will likely need to report the pension value to HMRC and potentially pay IHT before distributing death benefits to beneficiaries.

2. What allowances are available? The nil rate band (£325,000) and residence nil rate band (£175,000 if applicable) will apply to the combined estate including pension. Transfers to spouses will remain exempt.

3. What about QROPS? QROPS death benefits are already subject to the HMRC 10-year reporting window. The interaction of the IHT changes with QROPS is a specific area requiring specialist advice.

4. Existing pension pots vs. future contributions: It is not expected that the changes will differentiate between existing and new pension savings — the change applies to pension funds as they stand at death from April 2027.

Expat-Specific Considerations

Domicile and Deemed Domicile

UK IHT applies to worldwide assets for individuals who are domiciled in the UK (or deemed domiciled, which applies after 15 of the past 20 years of UK residency). For non-UK domiciled individuals, UK IHT typically applies only to UK-situs assets.

Pension funds held in UK registered schemes (SIPPs) are UK-situs assets — they are within the IHT estate regardless of where the member lives.

QROPS funds held in overseas schemes may have a different situs — potentially outside UK IHT if the member is not UK-domiciled and the assets are held outside the UK. This requires specific advice.

For expats who may not be UK-domiciled (those who have made a permanent life abroad and may have acquired a domicile of choice in their country of residence), the IHT position is more complex and potentially more favourable.

Spousal Exemption

Transfers between spouses — including pension death benefits passing to a UK-domiciled spouse — remain IHT-exempt. For married expats, this means that pension death benefits to a UK-domiciled surviving spouse will not be subject to IHT, regardless of the size of the pension.

However, for those without a UK-domiciled spouse, or those planning to pass pension wealth to children or other beneficiaries, the IHT impact of the 2027 changes is direct.

Planning Responses

Given the confirmed direction of travel (even if full details are pending), planning action before April 2027 is appropriate:

1. Review Nominations

Nomination forms should be reviewed to ensure they reflect the IHT-efficient options available within the new framework. Spousal nominations maintain their IHT exemption. Nominations to charity are IHT-exempt. Nominations to adult children (who will now potentially pay IHT on the pension) should be modelled.

2. Drawdown and Gifting

The strategy of preserving the pension intact for IHT-free death benefit is less compelling from April 2027. For members who have other income and do not "need" the pension in retirement, drawing down pension income and making gifts to beneficiaries (using the 7-year exemption, or annual gifting exemptions) may become more efficient than accumulating for death benefit.

This is a significant shift in strategy that many planners have built their retirement income sequencing around. The "spend non-pension assets first" strategy needs to be reassessed.

3. Alternative Structures

Discretionary trusts and other IHT planning structures (Business Relief, AIM portfolio investments) become relatively more attractive if pensions lose their IHT advantage. Whether these are suitable depends heavily on individual circumstances.

4. Model Both Scenarios

Until the final legislation is confirmed, modelling should be done under both the current rules and the proposed new rules to understand the range of outcomes and which planning actions are robust regardless of the final detail.