If you have a UK pension and you live overseas, some important changes are coming.
The 2024 UK Autumn Budget announced from 2027, UK pensions will be subject to Inheritance Tax if you die.
Before this, pensions were exempt from UK IHT, and used by many as a tool to pass on wealth.
The logic said spend your pension last, as you could leave this to your beneficiaries without paying IHT.
But this logic, doesn’t remain.
The UK have announced a move to a residence-based IHT regime.
This means expats who’ve lived outside of the UK for more than 10 years (or 10 of the last 20 years), will only pay UK Inheritance Tax on their UK-situs assets.
But it also means those living outside of the UK, will be limited to a £325,000 Nil Rate Band.
And lose the opportunity to gift assets to their non-UK resident spouses, free of IHT.
So any UK based assets, valued over £325,000 in total, could be subject to 40% Inheritance Tax when you die.
The problem? Your UK pension is a UK-situs asset, and difficult to move abroad.
To make matters worse your pension will be hit by IHT when you die, but the people you leave it to might also need to pay Income Tax when they withdraw the funds.
So what can you do about it?
If you want to make the most of your pension, rather than giving it to the tax man, you have 3 options:
1. Spend your pension over time
If you live outside of the UK, and are concerned about IHT on your UK assets…
The simple solution is to start spending them, before touching any assets you hold offshore.
For cash and investments, you can simply move them offshore, but for pensions it’s not so easy.
If you access your UK pension whilst living overseas, you may need to pay income tax on the funds.
This will depend on where you live now, and if there is a Double Taxation Treaty with the UK.
As an example, residents in Bahrain, Kuwait, Qatar, Saudi Arabia & the UAE, can claim relief from UK taxation on money they withdraw from their pensions.
But for residents elsewhere, the country you live in may be entitled to tax on your UK pension income. Or the UK may have the right to tax it anyway.
2. Withdraw your pension as a lump sum
For those living outside of the UK in a tax-friendly jurisdiction, for more than 5 years, there is an opportunity to claim double taxation relief and withdraw the funds in full.
In places like the UAE, this could mean paying no tax.
Or for those living in France, local tax laws allow you to withdraw the funds in full and pay a lower rate of income tax.
But to claim double taxation relief, you’ll need to get certain paperwork stamped by the local tax offices.
So it’s prudent to consult a local tax professional before making any decisions, to make sure this can be done.
In both cases, if you’ve been abroad for less than 5 years, this choice can be very risky.
Because if you return to the UK, within 5 years of leaving, HMRC might levy income tax on the full withdrawal when you return – at up to 45%.
So it requires careful attention.
3. Transfer to a QROPS
You could transfer your pension to a Qualifying Recognised Overseas Pension Scheme.
These are established in a range of countries, popular jurisdictions being Malta, Gibraltar and Guernsey.
But if you don’t live in the same country in which your QROPS is established, you’ll pay the 25% Overseas Transfer Charge when moving your pension.
This means its most appropriate for those who know they will never spend their pension.
Where a 25% Overseas Transfer Charge may be preferable to 40% UK Inheritance Tax.
Or if you already live in a country with a QROPS scheme.
NB: Prior to 2024, you were able to transfer to a QROPS in the EEA, if you were an EEA resident, without paying the 25% Overseas Transfer Charge. This is no longer the case, you now must live in the same country as the QROPS.
HMRC provide a full list of QROPS schemes by country here – https://www.gov.uk/guidance/check-the-recognised-overseas-pension-schemes-notification-list
If you found this useful, you might like our free 13 Step Financial Checklist for British expats living overseas.
Or if you’re looking for professional help with your life insurance, pensions & investments – click here to book your free initial consultation.
