British expats residing in Spain may face a significant inheritance tax (IHT) on their remaining pension funds due to upcoming changes in United Kingdom regulations. Beginning April 6, 2027, unused pension assets will be included in the calculation of an individual's estate for IHT purposes. This shift, announced in the 2024 Autumn Budget, could result in a 40% tax rate on pension pots exceeding the £325,000 threshold.
While living abroad often exempts individuals from UK IHT rules, assets held within the UK, such as pensions, can still be subject to these regulations. Experts advise that expats should not assume that moving to Spain automatically negates their inheritance tax liabilities with the UK. Even individuals who have not resided in Britain for many years may find their UK-held pensions fall under the new tax regime.
For those over the age of 75 at the time of death, beneficiaries could face a dual tax burden, with pension funds subject to both IHT and Income Tax. This situation may lead to beneficiaries inheriting a substantially reduced amount.
Some individuals are reportedly considering a strategy of drawing down their pension funds before death to mitigate the taxable value of their estate. However, financial advisors caution that such decisions should be made carefully, considering the income tax rates in the country of residence, which in this case is Spain. Planning and understanding one's financial and tax position is recommended well in advance of the rule changes.