IHT on pensions for non long-term residents (LTRs)

The Finance Act 2026 has now been enacted and includes some significant changes from the original draft wording, reversing the position for many non-LTRs.

The original draft pension IHT legislation, in our view, made pension wrappers effectively transparent for IHT. The underlying assets of the fund were what mattered for IHT, so a non-LTR could invest their pension in non-UK assets to escape IHT. This created some exciting planning opportunities on which we have been vocal in various publications.

Later amendments to the Finance Bill confused the matter by no longer taxing pension assets but “notional pension property”. This new wording was so wide that a non-LTR could conceivably be subject to IHT even on foreign pensions holding foreign assets, which certainly was not the Government’s intention, and was begging for clarification.

The final wording Finance Act 2026 now includes a key amendment: “… notional pension property in relation to a pension scheme is regarded as situated in the country or territory in which the scheme is established.”

It is now clear that the original position has been reversed, and a UK pension will be treated as a UK asset for IHT purposes regardless of what assets the scheme holds. Conversely a foreign pension will be treated as a foreign asset even if it holds UK investments.

Clients and their advisors have just under a year until 6 April 2027 to plan for this change. Other that pension withdrawals and transfers, and life insurance, major areas of tax planning are likely to include (a) non-LTRs holding significant UK assets through foreign pension schemes; and (b) using the UK’s Estate Tax Treaties to mitigate IHT exposure. For example, a US domiciliary who is not British (or who surrenders their UK citizenship) may be exempt from IHT on their UK pension under the terms of the US/UK treaty.