Inheritance tax wake-up call for all expat Brits in Australia still with private pensions in the UK!

West Australian

2 days ago

A major tax change in the UK could have serious consequences for thousands of British expats living in Australia with pension savings left behind in the old country.
From April 2026, pension pots inherited after the age of 75 will no longer be tax-free for beneficiaries. Instead, they'll be taxed as income, at the recipient's marginal rate — potentially as high as 45 per cent..
And from April 2027, the UK is going a step further — pensions will be brought into the scope of inheritance tax, too.
This 2027 change is a fresh move from the UK Treasury. Pensions, which were previously exempt from UK estate taxes, will now potentially face double taxation — income tax plus inheritance tax.
If you're an Australian tax resident with a UK pension and you're assuming it'll all pass seamlessly to your family one day, then think again.
Historically, UK defined contribution pensions — also known as 'private pensions' — were a handy estate planning tool. If the pension holder died before age 75, the entire pot could pass to beneficiaries tax-free, and even after 75 it was only subject to income tax when withdrawn.
More importantly, pensions were excluded from the estate for UK inheritance tax purposes, meaning they avoided the UK's hefty 40 per cent estate tax altogether.
But from April 2026, that income tax exemption ends for people who die over age 75. And from April 2027, the pension itself will be counted as part of the estate for inheritance tax purposes.
The UK government has confirmed that from April 2027, defined contribution pensions will be reportable for inheritance tax, with the responsibility falling on executors. In some cases, families could have just six months to report and pay tax or face late penalties.
If that sounds like a nightmare for grieving families navigating two tax systems, it's because it probably will be.
In contrast, Australian superannuation is relatively generous when it comes to estate planning because:
Adding further complexity is a lesser-known change to how the UK defines inheritance tax exposure.
From April 6 this year, the UK moved to a residence-based system. If you've been a UK tax resident for 10 out of the last 20 tax years, you may be classified as a long-term resident and subject to UK inheritance tax on your worldwide assets.
So, even if you've been living in Australia for years, you may still be caught by UK inheritance tax, because the new rules apply a 'tail' period of up to 10 years after you leave.
For many, transferring UK pensions to Australia via a Qualifying Recognised Overseas Pension Scheme has for a long time — and in the right circumstances — made financial sense. It consolidates retirement savings, aligns your money with your tax residency and gives you more control.
Now, with the emergence of this new tax regime, the argument for a transfer grows stronger.
It also removes the burden from your family of having to deal with HM Revenue and Customs, complex executor responsibilities and international tax reporting.
Of course, it's not always straightforward because:
But with professional advice, the process can often be navigated smoothly and the long-term benefits can be significant.
The UK's planned tax changes are a wake-up call for British expats in Australia because:
So, if you have UK pension savings and live in Australia, it's time to reassess your strategy.
A well-considered pension transfer, in the right circumstances and with the right personalised advice, could mean more of your hard-earned savings stay in the hands of your family — and not in the UK tax office.
Nicholas Hart is a financial adviser and UK Pensions expert at Empire Financial Group