Non-UK residents: how to escape inheritance tax on UK pensions

At present, most pension funds can be passed on after death without Inheritance Tax (IHT), although income tax should be considered on pension withdrawals by those who inherit the fund.

What’s changing?

From 6 April 2027, unused pension funds and most death benefits will be brought into the scope of IHT and will be subject to a 40% IHT charge on the death of the pension holder. This includes most non-UK pension schemes.
 
Many pension holders have been advised to preserve their pension wherever possible and spend-down their other assets to fund their retirement to minimise IHT exposure on their death. But the removal of the IHT exemption is a gamechanger and brings an end to this sort of financial planning in most cases.
 
The UK government published draft legislation in July 2025, setting out the main elements on the new IHT charge, although it is still consulting on the precise mechanisms by which pension IHT will be reported and collected.
 
This article focuses on the planning opportunities for pension-holders who are not UK ‘long-term resident’, meaning they have not been UK resident for at least ten of the past 20 tax years, and they fall outside the other transitional and tail provisions.

Are there any IHT exemptions?

The nil-rate band of £325,000 will apply to pension values in the same way as they do to other assets and will need to be apportioned between pension assets and other assets in the estate.
 
Many of the normal IHT exemptions also apply. For example, pensions inherited by a surviving spouse or civil partner of the same residency status (or who is themselves long-term resident) will be exempt from IHT under normal spouse relief rules[DC1] . For this reason, many defined benefit pensions, in which the only possible death benefit is a ‘widow’s pension’ to a surviving spouse, are unlikely to face IHT charges.
 
However, the draft legislation expressly prevents Business Property Relief (BPR) or Agricultural Property Relief (APR) applying to any trading business or farming assets held by the pension fund. Although this may be bad news for those hoping to claim BPR/APR, the inclusion of this wording in the draft legislation is helpful for non-residents for reasons discussed below.

I am not long-term resident – am I liable to IHT?

If you are not UK long-term resident, only your UK assets will be subject to IHT. This includes UK land and buildings, shares in a UK registered company, personal possessions and vehicles physically in the death, debts owed to you by a UK debtor and funds in a UK bank account (though special rules apply to foreign currency accounts). UK residential property indirectly held via an offshore entity (e.g. a non-UK company) or loans representing it, will also generally be in scope of IHT.
 
The key question for a non-long-term resident is, “is my UK pension a UK asset and therefore within the scope of IHT?” The answer may be surprising: not necessarily.

So how can I reduce IHT exposure on my pension?

The fact that a pension scheme is based, registered and administered in the UK would normally be sufficient to treat the asset representing the pension holder’s entitlement to receive benefits from the scheme (known legally as a ‘chose in action’) as a UK-situs asset.
 
However, the draft legislation does not apply this reasoning in creating the IHT charge. Instead, the new IHT charge is based on a tax-fiction that the deceased pension holder is treated for IHT purposes as though they were “beneficially entitled immediately before their death to so much of the property held for the purposes of the scheme as … [may be used to pay a death benefit]”.
 
In other words, the question is not “where is the pension scheme based?” but “what is the nature of the assets held within the pension scheme?” The pension scheme is transparent for IHT purposes.

This is not a novel new approach, but both HM Revenue and Customs and industry professionals are already familiar with a similar transparent approach taken for certain forms of trust known as ‘qualifying interests in possession’ which trigger an IHT charge on the death of an individual beneficiary. The location of these trusts is usually irrelevant for IHT purposes – it is the situs of assets within the trust that matters. The wording of the IHT charge for these trusts is very similar to the new draft legislation.
 
The fact that the draft legislation expressly prohibits BPR or APR applying to pension IHT charge is further evidence that it is the property within the fund that is subject to IHT, not the scheme as a whole. Otherwise, it would not be necessary to prohibit these reliefs.
 
This means that planning opportunities exist to change the situs of assets within the pension to invest in non-UK assets. Full advice is needed as the question of whether an investment held in a portfolio managed by UK managers and custodians is or is not a UK asset is often a nuanced one. For example, offshore investments held in a UK mutual fund will be considered UK assets for IHT purposes, as would offshore investments represented by a UK CREST Depository Interest (CDI).

Do I need my pension administrator to agree with this planning?

Most pension schemes invest primarily in UK assets, so the administrator would need to be agreeable to investing in non-UK alternatives. This is much more likely in a self-invested personal pension (SIPP) or other scheme over which the member has a high degree of control over the pension’s investments.
 
The pensionadministrator is also likely to need to submit IHT filings following the member’s death. The exact nature of these is not yet known, and we do not yet know whether pension administrators will be entitled to rely on the tax filing position of the personal representatives, or if administrators will themselves be ‘on the hook’ for the tax filing position. It would be sensible to ensure that the pension administrator is in agreement that the scheme assets are not UK situs and not subject to IHT to ensure they do not go ahead and pay IHT following the death.

What about non-UK pensions?

The reverse side of the coin is the possible IHT charge on non-UK pensions, even when held by a non-long-term resident.
 
Most foreign pensions fall under the scope of the new IHT charge, depending on whether the pension assets are UK-situs or not. Since pension schemes are transparent for IHT purposes as discussed above, that means that the fact a pension scheme is not based in the UK does not mean an IHT charge is impossible. It is important to ensure that non-UK pension funds do not hold UK investments.

How can Birketts help?

The Birketts international private client team can assist clients outside the UK mitigate their IHT exposure on their UK and foreign pensions as well as wider tax and estate planning. We also advise UK pension scheme administrators on IHT matters. Please get in touch if you would like to discuss this further.