For years, UK pension pots sat outside the UK Pension Inheritance Tax net. Many higher-net-worth savers quietly treated their pension as a tax-efficient vehicle for passing wealth to the next generation – contributing beyond their own retirement needs and leaving the surplus to grow, untouched.

That strategy is about to close. From April 2027, unused UK pension funds will fall within the scope of inheritance tax at 40 per cent – a change announced in the November 2024 Budget that is already reshaping how advisers think about retirement and estate planning simultaneously.

For UK expats in Hong Kong, Singapore, the UAE and beyond, the implications are considerable. The rule change does not only affect UK residents. It also captures those who have been non-UK tax resident for years but still hold UK pension assets.

What Is Changing and When

Until recently, UK pension funds benefited from a near-total exemption from inheritance tax. The exemption was introduced by former chancellor George Osborne in 2015, allowing pension holders to pass on unused retirement savings free of IHT – a loophole that those with means used extensively.

That exemption is being removed. From April 2027, pension funds will be treated as part of the estate for IHT purposes, exposing them to the standard 40 per cent charge on assets above the nil-rate band of £325,000.

The compounding effect is significant. Where a pension beneficiary is also subject to income tax on withdrawals, analysis by Rachel Vahey at AJ Bell suggests that for every £100 held in pension on death, IHT can reduce the pot by £40 – and income tax on what remains could absorb a further £67 in certain circumstances.

The 50 Per Cent Withholding Rule

In May 2026, HMRC confirmed a further administrative measure: pension schemes will be permitted to withhold up to 50 per cent of a pension pot for up to 15 months in cases where the estate executor believes an IHT liability may arise. Interest begins accruing to HMRC at the six-month point.

Experts have warned this mechanism will increase complexity and risk creating family tensions, particularly where estate executors are themselves family members and must hold back funds intended for other beneficiaries.

“Estate disputes already cause family friction, and this will only exacerbate matters. People rightly worry that their financial legacy can cause family rifts.” – Rachel Vahey, AJ Bell

Government projections suggest the pension IHT changes will pull an additional 10,500 estates into the IHT net by 2027-28, while a further 38,500 will face higher tax bills – at an average additional cost of £34,000.

What This Means for Expat Investors

The reach of these changes extends well beyond UK residents. Tim Smith, legal director at Eversheds Sutherland, has noted that the pension IHT change will capture those not tax resident in the UK but who hold UK-based pensions – a category that includes a significant number of British expats working across Asia and the Middle East.

Rethinking the Pension as a Legacy Tool

The fundamental shift is that saving into a UK pension beyond your own retirement needs now carries a tax cost. Estate planners have begun categorising surplus capital as what they call “red money” – funds that would pass to descendants – and the pension is no longer an efficient home for it.

“Saving beyond what you need is falling out of favour for IHT reasons, and any surplus needs a plan,”says Les Cameron, retirement savings and tax expert at M&G.

Acting Before the Deadline

The consensus among advisers is clear: waiting is the most expensive option. Claire Trott, head of advice at St James’s Place, advises clients to map what capital they hold and what they need for end-of-life costs – and to plan the remainder explicitly.

Options include spending down pension assets earlier in retirement, gifting from surplus income under the regular gifts exemption, placing assets into trust structures, or taking tax-free cash from UK pensions before relocating abroad.

For expats considering a permanent return to the UK, the Foreign Income and Gains regime – introduced in April 2025 – allows overseas capital gains and income to be realised tax-free within the UK for up to four years after returning. There is also a pension carry-forward mechanism allowing returning expats to mop up three prior years of unused pension allowances, worth up to £180,000 gross.

For those planning to retire abroad, Kevin O’Shea at RBC Wealth Management advises taking the tax-free cash portion of a pension before relocating, as pension withdrawals may be taxed in the new country of residence. There is also growing interest in transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS), which can help pensions escape UK IHT once an individual has been non-UK tax resident for at least 10 years.

The Life Insurance Response

Demand for whole-of-life insurance policies – which pay a guaranteed sum to beneficiaries on death and, when held in trust, sit outside the taxable estate – has surged. Evelyn Partners reported a 66 per cent increase in cases processed in 2025, while Royal London’s insurance arm sold 50 per cent more whole-of-life policies over the same period.

Legal & General reported a 500 per cent increase in the value of whole-of-life sales between Q1 2024 and Q4 2025, with much of that growth attributed directly to rising demand for policies that cover IHT costs on pensions following the Budget announcement.

These policies are particularly relevant for expats who want to keep UK assets intact – including property or business interests – while ensuring the IHT bill does not force a sale or create a funding crisis for executors.

The Wider Planning Question

The pension changes do not sit in isolation. They are part of a broader tightening of the UK’s inheritance tax framework that includes changes to agricultural and business property relief, the removal of non-dom protections, and the extension of IHT to certain worldwide trust assets.

For UK expats with ties to the UK – whether through property, pensions, business ownership or domicile – understanding your current exposure requires examining multiple variables at once. That starts with establishing where you stand on the UK Statutory Residence Test.

NOT SURE WHERE YOU STAND ON UK TAX RESIDENCY? Use our UK Statutory Residence Test tool to assess your position – then speak with Annette Houlihan to understand what it means for your estate. careysuen.com/uk-residence-test

This article is for informational purposes only and does not constitute financial advice. Carey Suen works exclusively with high-net-worth investors who meet the relevant eligibility criteria in their jurisdiction.