BRITISH expats living in Spain have been warned to review their UK pensions before major changes to inheritance tax come into force next year.
Under sweeping new UK rules, money left in most UK pensions when someone dies will be taken into account when calculating inheritance tax from April 6 next year – even if they no longer live in Britain.
This means some British expats in Spain could leave their families with a tax bill on pension savings that currently are not taken into account when working out whether any inheritance tax is due.
The change, announced by the UK government in its 2024 Autumn Budget, aims to stop pensions being used as a way of passing wealth on to family members rather than funding retirement, officials have said.
Chris Ball, CEO of expat financial planning firm Hoxton Wealth, said: “If you are currently living in Spain, you might think that moving to the country automatically removes your inheritance tax liabilities.
“However, this isn’t the case.”
He added: “If you are trying to understand your and your family’s position, start doing so now – and don’t rush into any big decisions.”
Since April 2025, the UK has used a person’s tax residence history to decide whether their assets abroad can be subject to inheritance tax.
Anyone who has been a UK tax resident for at least 10 of the previous 20 tax years can be classed as a ‘long-term resident’ of the UK, Ball explained.
For those people, assets held anywhere in the world can potentially be subject to UK inheritance tax.
After someone has been away from the UK for long enough to lose that status, their assets outside Britain can generally fall outside the UK inheritance tax rules.
However, assets still held in the UK can remain subject to the tax.
From April 2027, that will include most unused money held in UK pensions.
Ball said: “A key change that Brits residing in Spain need to be aware of is that from April 2027, a UK-held pension will fall into your UK inheritance tax net, even if you never set foot in Britain again.”
The change does not mean people will lose money from their pensions while they are alive.
However, it could mean their children or other beneficiaries receive less after inheritance tax has been taken into account.
The UK government estimates that around 10,500 estates will face an inheritance tax bill in 2027-28 that they would not otherwise have paid because of the pension changes.
A further 38,500 estates are expected to pay more tax as a result.
However, most people who die will still leave estates that are not liable for inheritance tax.
Ball said there may be ways for some expats to reduce their potential tax bill, including taking money from their pension while they are alive and, in some circumstances, giving it to family members.
He warned, however, that people should not make major financial decisions simply because the deadline is approaching.
“It might be possible for UK expats in Spain to draw down funds from their pension tax-free, thanks to the two countries’ double taxation treaty, though we strongly advise that you seek support from a UK Chartered Tax Advisor when doing so, whilst seeking Spanish tax support,” he said.
“Good planning rarely happens in a rush, with deadlines looming, which might be the case in March or April of next year.
“So, if you are trying to understand your and your family’s position, start doing so now – and don’t rush into any big decisions.”
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