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The Coming UK Inheritance Tax (IHT) Shake-up: Why You Need a Will

by | Nov 21, 2025

Top Stories, UK Expats, Wills

UK pensions are about to be caught in the IHT net

What’s Changing? Well, pensions are about to be caught in the IHT Net

Starting from 6 April 2027, most unused UK pension funds (defined-contribution, uncrystallised benefits, etc.) will be treated as part of your estate for IHT purposes and pension scheme administrators will be responsible for reporting and paying the IHT due on these pension funds.

The standard IHT rate (on the portion above the available nil-rate bands £325,000 plus other exemptions) is 40%, so this could be a significant tax for large pension funds. Importantly, this applies regardless of whether you live in the UK or abroad — UK-registered pension schemes will be subject to the rules even if the member is non-resident.

There’s also a risk of double taxation. After IHT is deducted, beneficiaries may pay income tax when they draw from the inherited pension — especially if the deceased was over 75. That said, the government proposes to avoid “double tax” on the exact portion of the pension used to pay the IHT: the amount equal to the IHT could be exempted from income tax, but any remaining inherited pot may be taxed as income.

Why This Matters for Non-UK Spouses / Non-Long-Term UK Residents
From 6 April 2025, the UK is changing how IHT liability is assessed and the old “domicile” basis is being replaced with a residence-based long-term resident (LTR) test. Under the new rules, someone who has been UK-resident for 10 out of the past 20 tax years becomes an LTR, and their worldwide assets (not just UK assets) may be subject to IHT. However, even if non-LTR, the pension will still attract IHT.

On death, if the pension holder is married to a UK spouse, there will not be any IHT to pay at that time- irrespective of the size of the fund. But, if your spouse is not British they may be limited to a lower exemption and liable for tax at 40% over the current nil-rate band of £325,000.

The new rules will affect many expats:

Living abroad does not shield you: The 40% IHT tax rate* applies regardless of whether you live in the UK or abroad — UK-registered pension schemes will be subject to the rules even if the member is non-resident.

A non-British spouse may have to pay: On death, if the pension holder is married to a UK spouse, there will not be any IHT to pay at that time – irrespective of the size of the fund. But, if your spouse is not British they may be limited to a lower exemption and liable for tax at 40%*.

*40% tax on the portion above the available nil-rate bands £325,000 plus other exemptions.

Chris Lean

Chief Investment Officer, Aisa International CZ

Why Having (or Updating) a Will Is Particularly Important Now
1. Clarity on Beneficiaries
As pensions are potentially becoming part of the IHT estate, it’s more important than ever to clearly state who should receive what. A will ensures wishes are known and reduces the risk of unintended tax burdens or disputes.
2. Naming a Personal Representative
Under the new rules, personal representatives (PRs) of the estate will need to coordinate with pension scheme administrators to report and pay IHT. Without a will, appointing the right PR (someone who understands the complexities of pension IHT) can be harder. This will be especially hard if the will is not British or the PRs are not in the UK.
3. Mitigating Risk for Non-Spousal Beneficiaries
If children or other non-spousal beneficiaries are to inherit the pension, they may face IHT (and possibly income tax). A will can help to structure gifts, trusts, or other mechanisms to manage or mitigate that tax.
4. Spousal Exemption Strategies
For couples where one spouse is non-LTR (or non-domiciled under the old system), a will alone won’t fix the IHT cap issue — but combined planning (will + potential LTR election + lifetime gifting) may help minimize the tax.
5. Liquidity Planning
This is often a big issue because PRs might need to pay IHT before all pension benefits are distributed, having non-pension assets to cover that tax makes things smoother and less risky for beneficiaries.
Everyone's situation is different.
Get Answers to Your Questions Now
What Practical Recommendations Could We Suggest?
  • Talk to Financial Adviser. One that can work with lawyers who understand estate planning. These changes are complex, especially for cross-border situations. An adviser can help you model different scenarios.
  • Review and Update Your Will. If you already have a will, revisit it sooner rather than later. Make sure it reflects your current wishes in light of these changes, names a capable personal representative, and addresses how to pay IHT liabilities.
  • Plan for Liquidity. Ensure there are sufficient non-pension assets (or other mechanisms) to cover the IHT that may arise on the pension portion of your estate.
  • Communicate With Beneficiaries. Make sure your intended heirs understand these changes — especially the double tax risk (IHT + income tax) — so they’re not caught off guard.
  • Review Regularly. As the April 2027 implementation date approaches, revisit your estate plan frequently. Legislation, tax thresholds, or personal circumstances might change.

Mutual Wills and Mirror Wills: What Is the Difference?

Mirror and Mutual Wills – Part 2

The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

Vyjádřené názory v tomto článku nelze považovat za osobní poradenství. Vždy se proto obraťte na kvalifikovaného, ideálně regulovaného poradce, který vám poskytne aktuální, osobní doporučení šitá na míru vaší konkrétní situaci. Pokud se rozhodnete jednat bez takového poradenství, činíte tak na vlastní odpovědnost a vaše jednání spadá pod režim „execution only“ (pouhá realizace pokynu bez poradenství). Autor nepřijímá žádnou odpovědnost za rozhodnutí osob, které se spoléhají na názory uvedené v tomto obecném článku bez personalizovaného poradenství. Je důležité si uvědomit, že pokud je článek datován, vychází z právních předpisů platných k uvedenému datu. Právní předpisy se mohou měnit a články jsou aktualizovány jen zřídka. Doporučujeme proto vždy ověřit případné novější články nebo změny legislativy na oficiálních vládních stránkách, protože na tento článek nelze spoléhat izolovaně.

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Autorem článku je:

Chris Lean

In the UK he worked with accountants as an independent financial adviser, qualified as a Chartered Financial Planner and became an examiner for the Chartered Insurance Institute. He also qualified as a European Financial Planner and specializes in investment and pension advice to clients.

Aisa International is the only financial advice service company specialising in advice for expats that is regulated as a Securities Trader in the Czech Republic, USA, and UK.

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