For many UK expats in the UAE, pensions have long been treated as the asset you touch last.
The logic was well established. Pensions grew tax-efficiently, sat outside the estate for UK Inheritance Tax (IHT), and could pass to the next generation with little or no tax. Spend everything else first, leave the pension until last.
In practice, we are now seeing that logic unravel.
The Finance Act 2026 received Royal Assent on 18 March 2026, confirming that from 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a person’s estate for IHT purposes.
The changes are now legislated and may have significant implications for UK expats with substantial pension wealth. Senior Partner Paul Waterman explains what the changes mean and where UK expats should focus.
Table of Contents
The strategy that has historically worked
Most defined contribution pensions have generally sat outside an individual’s estate for IHT. This is largely because of the discretionary structure used by the majority of modern schemes, under which the member never had a fixed entitlement to the funds on death.
This influenced the retirement and estate planning approach adopted by many individuals.
Many retirees were encouraged to:
- Fund retirement from cash, ISAs and general investment accounts first
- Preserve the pension for as long as possible
- Pass the pension to beneficiaries outside the IHT net on death
Where death occurred before age 75, beneficiaries could often inherit pension funds free from income tax, subject to the Lump Sum and Death Benefit Allowance. After 75, beneficiaries generally paid income tax only as funds were withdrawn.
For many families, this formed an important part of planning for the transfer of wealth across generations.
What is changing from April 2027
1. Pensions come into the estate
From 6 April 2027, most unused pension funds and death benefits, including drawdown funds, will be included in the value of the deceased’s estate for IHT, for deaths on or after that date.
Amounts exceeding the available allowances may be subject to IHT, depending on individual circumstances and the applicable exemptions and reliefs. The nil rate band is currently £325,000 per person, with a residence nil rate band of up to £175,000 where a home passes to direct descendants.
These thresholds are frozen until April 2031, and the main nil rate band has been unchanged since 2009. Frozen allowances, together with changes in asset values, may result in more estates becoming subject to IHT over time.
2. Reporting responsibility shifts to families
Personal representatives, meaning executors or administrators, will be responsible for reporting and paying any IHT due on unused pension funds, with pension schemes required to provide valuations within four weeks of being notified of a death.
For families managing an estate across multiple jurisdictions, this may create additional administrative complexity.
3. Some exemptions remain, with an important caveat
Not everything is caught.
- Death benefits paid to a surviving spouse or civil partner remain exempt where the surviving spouse is a long-term UK resident. Where they are not, different rules can apply and the exemption may be limited. This is a critical point for internationally based couples, and advice should be sought.
- Charity lump sum death benefits remain excluded
- Death in service benefits from registered pension schemes are excluded
The scale of the change
The Government estimates that in 2027-28, around 10,500 of the approximately 213,000 estates with inheritable pension wealth will pay IHT for the first time as a result of these changes, and around 38,500 estates will pay more IHT than they otherwise would have.
Where death occurs after age 75, beneficiaries may also pay income tax at their marginal rate on withdrawals from an inherited pension, in addition to any IHT already paid by the estate. To illustrate: if 40% IHT is paid on the pension, and a beneficiary then pays income tax at 45% on what remains, the combined effective rate can reach up to 67%. For a higher rate taxpayer, the equivalent figure would be up to 64%. The actual position depends on the beneficiary’s individual tax circumstances.
A simple example
Consider a married couple with the following assets:
- Family home: £800,000
- Investment portfolio: £500,000
- Pension assets: £700,000
Total family wealth: £2 million.
Before April 2027. Only the home and portfolio (£1.3 million) are assessed. After combined allowances of £1 million, the taxable estate is £300,000. IHT payable: £120,000.
From April 2027. The unused pension is included. The taxable estate rises to £1 million. IHT payable: £400,000.
The family’s wealth has not changed. Only the legislation has. Their IHT bill increases by £280,000.
For larger estates, the effect compounds. The residence nil rate band tapers away for estates exceeding £2 million and disappears entirely for a couple once the combined estate reaches £2.7 million. For a family with a £5 million estate including £2 million of unused pensions, the changes could add in the region of £800,000 to the IHT bill, before any income tax paid by beneficiaries on withdrawals is considered.
These are illustrative examples only and do not account for all exemptions or reliefs. Outcomes will depend on individual circumstances.
Where expats are getting this wrong
- Assuming non-residence removes UK IHT
Living in the UAE does not, by itself, take a UK pension out of the IHT net. UK-situated assets, including UK pension funds once they form part of the estate from April 2027, remain within the scope of UK IHT regardless of residence status. - Relying on strategies designed under the old rules
“Spend everything else first” was best practice for a decade. From 2027, the suitability of this approach may change depending on individual circumstances and the wider estate. - Outdated beneficiary nominations
Under the new rules, nominations should be reviewed carefully. Who you nominate, and their residence status, may now materially change the tax outcome.
Considerations for UAE residents
While these changes create challenges, the UAE position may offer planning flexibility that is not generally available to UK residents.
The UK and UAE double taxation agreement. Under the treaty, most private pensions are generally taxable only in the country where the recipient is resident. A UK national who is tax resident in the UAE would usually have their UK private pension income taxed only in the UAE, where there is currently no personal income tax. Eligible individuals may apply to HMRC for a nil tax (NT) code so that UK pension payments can be made gross, subject to HMRC approval. Government service pensions, such as NHS, civil service and military pensions, remain taxable in the UK.
The new residence-based IHT regime. From 6 April 2025, liability to IHT on non-UK assets is determined by whether an individual has been UK tax resident for at least 10 of the last 20 tax years, rather than by domicile. The IHT treatment of non-UK assets under the residence-based regime depends on an individual’s residence history and specific circumstances.
In practical terms, a UAE resident’s position can differ significantly from that of a UK resident, and how and when pension benefits are accessed may affect the level of unused pension that would otherwise form part of the estate from 2027. Whether any course of action is appropriate depends entirely on individual circumstances.
This is a highly specialised area of cross-border planning and is certainly not a one-size-fits-all solution. Drawing benefits early carries income tax, investment and retirement income consequences of its own, and specialist tax advice should be sought before acting.
A structured review with your financial planner should focus on
- Withdrawal sequencing
Assess whether the order in which retirement assets are drawn still makes sense under the new rules - Estate exposure modelling
Quantify the potential IHT position with pensions included, before and after April 2027 - Nominations and estate planning
Review beneficiary nominations, wills, lifetime gifting and how pensions interact with wider family wealth - Residence position
Confirm your long-term residence status under the post-2025 rules and what remains within UK IHT scope
For many UK expats, this review can extend to the UK State Pension, including whether voluntary National Insurance contributions still make sense.
FAQs
In most cases, yes. From 6 April 2027, most unused defined contribution pension funds and death benefits will be included in the value of your estate for IHT purposes, for deaths on or after that date. Certain benefits remain outside the charge, including death in service benefits from registered pension schemes.
Living in the UAE does not, by itself, determine the IHT treatment of UK pension assets. The position will depend on the applicable rules and individual circumstances.
Death benefits passing to a surviving spouse or civil partner remain exempt where the survivor is a long-term UK resident. Where the surviving spouse is not, the exemption may be limited, which is a particularly important consideration for couples based in the UAE. Advice should be sought on your specific position.
Not necessarily. Reducing an unused pension may lower future IHT exposure, but withdrawals carry income tax, investment and retirement income consequences of their own. The right approach depends on your residence position, the size and structure of your pension, and your wider estate. This should be assessed case by case with advice.
A broader planning perspective
At GSB, we advise UK expats and internationally mobile clients on retirement planning, cross-border financial planning and wealth preservation. We help clients understand how changes to pension and inheritance tax rules may affect their wider financial planning, working alongside specialist tax advisers where appropriate.
Reviewing your planning before the legislation takes effect may provide considerably more flexibility than waiting until the new rules apply.
If your UK pension represents a significant proportion of your wealth, now is the time to review your strategy.
Contact us
Sources:
- HM Revenue & Customs (HMRC) – Inheritance Tax on unused pension funds and death benefits, consultation response and technical guidance
- UK Government – Finance Act 2026; Inheritance Tax guidance for long-term UK residents; Autumn Budget statements on nil rate band thresholds
- HMRC Inheritance Tax Manual – Long-term UK residence test (IHTM47020)
- UK-UAE Double Taxation Agreement – Pensions provisions and HMRC Form DT-Individual guidance
Disclaimer:
This article is provided for general information purposes only and does not constitute financial, tax, legal or investment advice, nor is it an offer or solicitation to provide any regulated service or product. GSB Capital Ltd does not provide tax advice, and any references to taxation reflect our understanding of current legislation and HMRC practice, which may change.
The information is based on our understanding of UK tax rules as at July 2026, which are subject to change. Tax treatment depends on individual circumstances, and the UK tax rules referenced apply to persons with UK tax obligations. Past performance is not a reliable indicator of future results, and the value of investments can fall as well as rise.
This article is not directed at persons in any jurisdiction where its publication or availability would be contrary to local law or regulation. You should seek professional advice tailored to your own circumstances before acting on any information in this article.
GSB Capital Ltd is registered with the Dubai International Financial Centre (DIFC), licence no. CL4377 and is regulated by the Dubai Financial Services Authority (DFSA) under license no. F006321.