British expatriates residing in Spain face a significant change in how their retirement savings may be taxed upon death, with new United Kingdom inheritance tax (IHT) rules set to come into effect on April 6, 2027. These regulations, announced in the 2024 Autumn Budget, stipulate that any remaining pension funds will be incorporated into the total value of an individual's estate for IHT purposes.
The IHT rate is 40% and applies to estates valued above a threshold of £325,000. Previously, many Britons living abroad may have believed that establishing residency outside the UK would exempt them from UK IHT. However, assets held within the UK, such as pension pots, can still be subject to these rules.
According to financial experts, even if an individual has not lived in the UK for many years, a pension held in the UK could still be liable for inheritance tax. This could result in beneficiaries inheriting a substantially smaller amount of money. The situation can be further complicated for individuals who die after the age of 75, as their beneficiaries might face both inheritance tax and income tax on the remaining pension funds, a scenario described as potential 'double taxation'.
Financial planners are advising British expats to assess their current financial position and understand the implications of these upcoming changes. Some expats are reportedly considering strategies such as spending down their pension funds while still alive to reduce the taxable value of their estate. However, advisors caution that any such decisions should also take into account the income tax rates in their country of residence, Spain in this instance.