UK Inheritance Tax for British Expats: Thresholds, Residency Rules and the 2027 Pension Change

The nil-rate band of £325,000 is the threshold below which no IHT is charged on a person's estate. An additional residence nil-rate band of up to £175,000 is available where a qualifying UK residential property passes to a direct descendant, giving a combined individual maximum of £500,000. Where neither spouse or civil partner has used their thresholds, the unused allowances can be transferred to the survivor, giving a combined maximum of up to £1,000,000 including both RNRBs. The RNRB tapers by £1 for every £2 that the net estate exceeds £2,000,000, disappearing entirely for estates above around £2,350,000 for a single individual. Both thresholds are frozen through 5 April 2030. The standard IHT rate is 40% on the amount above the available threshold, reduced to 36% where at least 10% of the net estate passes to a qualifying charity. These figures are sourced directly from gov.uk.

From 6 April 2025, the question of whether an expat's overseas assets fall within the IHT net is determined by the long-term UK residence (LTR) test rather than domicile. An individual qualifies as a long-term UK resident if they have been UK tax resident for at least 10 of the previous 20 tax years immediately before the relevant chargeable event. If LTR status applies, worldwide assets, including overseas property and foreign bank accounts owned outright, are in scope. Crucially, LTR status persists for a tail period after leaving the UK: for those with 10 to 13 years of UK residence, the tail is 3 years; the tail extends proportionally, reaching a maximum of 10 years after departure for those with 20 or more years of prior UK residence. An expat who has recently left the UK after a long career there may remain an LTR for many years. UK-situs assets remain in scope regardless of LTR status: someone with fewer than 10 qualifying years of UK residence in the last 20 is not an LTR, but their UK property and UK-registered investments remain subject to IHT.

From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of the estate for IHT purposes. Until that date, defined contribution pensions, including SIPPs, can typically pass outside the taxable estate to nominated beneficiaries. After that date, the unused pot is counted in the estate and may trigger or increase an IHT liability. Personal representatives, not pension scheme administrators, will be responsible for reporting and paying any IHT due on those funds. Death-in-service benefits from a registered pension scheme, and dependant's scheme pensions from a defined benefit or collective money purchase arrangement, remain outside scope. This reform is a significant change for anyone whose estate planning relied on pension drawdown strategies as a route to passing wealth free of IHT.

Gifts made to individuals during a person's lifetime are potentially exempt transfers. If the donor survives 7 full years, no IHT applies to the gift. If the donor dies within 3 years, the full 40% rate applies to the amount of the gift above the available nil-rate band. For deaths between 3 and 7 years after the gift, taper relief reduces the effective rate: 32% for 3 to 4 years, 24% for 4 to 5 years, 16% for 5 to 6 years, and 8% for 6 to 7 years. The annual gift exemption of £3,000 per tax year (with one unused year able to be carried forward to give a maximum of £6,000 in a single year) and the small gifts exemption of up to £250 per recipient per tax year fall outside the PET rules and are immediately exempt. Transfers between spouses and civil partners are generally exempt from IHT with no monetary cap, provided the recipient is UK-domiciled. How this interacts with the new long-term residence framework is a point a regulated specialist can confirm, as the gov.uk guidance reviewed during research described the pre-April 2025 domicile position and the new LTR interaction requires individual assessment.