Earlier this week, the Government published the draft Finance Bill 2025–2026. This included the much-anticipated draft legislation to bring pensions within the scope of UK inheritance tax. This article looks at what the changes mean for international clients.
Background
In the 2024 Autumn Budget, the Government announced its plans to bring most pension schemes within the scope of inheritance tax. Currently, with the exception of “non-discretionary” pension schemes (such as the judicial and NHS schemes), funds held within a pension do not form part of a deceased person’s estate for inheritance tax. What this means in practice is that no inheritance tax is paid on those funds on death.
The Government believes that this treatment has distorted the use of pensions from a vehicle intended to fund retirement, to one used more for tax planning. It hopes to tackle this by bringing all pensions within the scope of inheritance tax from 6 April 2027.
This change will have an obvious impact for those who are UK based, with the Government expecting the measure to bring an additional 38,500 estates within the scope of inheritance tax in the 2027/2028 tax year alone.
However, it will also be important for people who are leaving or moving to the UK to understand the extent to which their pensions will be within the scope of inheritance tax.
What types of pension will the new rules cover?
The new rules will cover “registered pension schemes”, which broadly means schemes which are recognised by and registered with HM Revenue and Customs. This will cover almost every UK pension. However, the rules will also apply to Qualifying Non-UK Pension Schemes (QNUPS) (which also includes Qualifying Registered Overseas Pension Schemes (QROPS)). Death in service benefits paid by an employer are excluded from the new rules.
In short, any pension scheme that is registered with HM Revenue & Customs is potentially within the scope of the proposed new rules. Pension schemes (whether based in the UK or overseas) that are not registered with HM Revenue & Customs are already included within a person’s estate on death.
Relocating to the UK
The position for clients moving to the UK is simple. Once they have been UK resident for 10 or more of the previous 20 tax years, they will be a “Long-Term Resident”, and their UK and non-UK assets will be within the scope of Inheritance Tax. After 6 April 2027, this will include any non-UK pension schemes they may have, regardless of whether they are QNUPS, QROPS or unregistered schemes.
Leaving the UK
The opposite is true for those emigrating overseas. After a maximum of 10 years of non-UK residence, they will cease to be Long-Term Residents and Inheritance Tax will only apply to their UK assets. How does this rule interact with the draft legislation?
The wording of the new draft rules provides that members of registered pension schemes or QNUPS are to be treated as beneficially entitled immediately before their death to the property held for the purposes of the scheme for their benefit. It appears then that the location of the assets held within the pension could impact the Inheritance Tax treatment. If the pension holds non-UK assets, they will be outside of the scope of tax.
The same analysis would apply to people who have moved to the UK but are not yet Long-Term Residents (i.e. they have been UK resident for fewer than 10 tax years).
If correct, this would be an odd result. It would mean that somebody who is not a Long-Term Resident could remove any exposure to IHT on their UK pension or QNUP / QROP simply by investing in non-UK assets. This would appear to run contrary to the Chancellor’s ambition to increase investment in UK markets.
If this is not the case and UK pensions, QNUPS and QROPS are intended to permanently be within the scope of Inheritance Tax, there will be relatively few planning options available to emigrants. A transfer to an overseas unregistered pension scheme would likely prevent an Inheritance Tax charge from arising on death. However, the transfer itself could be subject to an unauthorised payment charge of up to 55%.
What should clients be doing?
The legislation is only in draft form, and it is likely to undergo amendments over the next 20 months before it becomes law. We would not therefore recommend taking any steps on the basis on the draft legislation. However, any clients leaving or moving to the UK would be well advised to review their existing pension arrangements. In particular, they should clarify what type of pension schemes they are a member of and how the underlying funds are invested. This will ensure that they are fully prepared to act once the final legislation is available.
Alex Hunt is Legal Director in the International Private Client Team at Birketts LLP
