UK Pension Inheritance Tax Changes for Expats in Spain: Are You Ready for 2027?

British expatriates residing in Spain, including those enjoying life in Mallorca, must prepare for a significant overhaul of inheritance tax rules affecting their UK-registered pension schemes. From 6 April 2027, under the Finance Act 2026, these pensions will be explicitly subject to a 40% UK Inheritance Tax (IHT), irrespective of whether the scheme holder is a UK resident or not. This change reclassifies UK pensions, such as a SIPP, as UK-situs assets, bringing them fully under the scope of UK IHT regulations even if you've shed your UK tax status.

The standard 40% IHT rate will apply to the portion of your total estate, including your pension pot, that exceeds the current Nil-Rate Band of £325,000, a threshold frozen until 2030. While leaving your pension to a surviving UK-citizen spouse or civil partner remains tax-exempt, non-UK citizen spouses may face a capped spousal exemption, potentially triggering an immediate tax liability. Furthermore, if the pension holder passes away after the age of 75, beneficiaries could face 'double taxation': first, the 40% IHT on the estate level, and then income tax at their marginal rate upon withdrawal of the remaining funds.

For those who have resided outside the UK for over a decade, only UK-based assets—specifically your UK pension and any UK property—will be subject to this IHT. This looming tax change is prompting many expats to adopt a 'spend the pension first' strategy. By drawing down pension funds during their lifetime, individuals can reduce the size of the taxable pot upon death. However, this approach requires careful consideration of local income tax rates in Spain, which could impact overall financial planning for property owners and buyers. Proactive financial planning is essential to navigate these complex inheritance tax implications.