A quiet but significant tax change is now less than two years away, and it could catch a lot of British families off guard. From 6 April 2027, unused pension funds and pension death benefits will count towards a person's estate for UK inheritance tax (IHT) for the first time. For households whose pension is their biggest asset, that single adjustment can turn a manageable tax bill into a six-figure problem.
The wider context matters too. Frozen allowances and rising asset values have already pulled more families into the IHT net — it is no longer just the very wealthy who need to think about it. Pensions will accelerate that trend, because adding a large SIPP to the estate can push a family over the thresholds almost overnight.
Moving abroad does not provide an escape. Under current rules, anyone who leaves the UK remains a 'long-term resident' for the first 10 years after departure, meaning their worldwide estate — including a new home in Portugal — stays within reach of UK IHT. Only after spending 10 of the previous 20 tax years outside the UK do overseas assets generally fall outside the net, though UK-situated assets remain taxable.
A worked example shows how sharp the impact can be. Take a British couple who moved to Portugal in 2022, keeping a £510,000 UK property, £370,000 Portuguese home, £220,000 of UK investments, and SIPPs worth £690,000 and £160,000. With pensions excluded, their projected IHT bill sits around £40,000 on second death. Once pensions are counted, it jumps to roughly £380,000. And IHT is not necessarily the full hit — depending on ages and how beneficiaries draw the money, income tax can stack on top, pushing the effective rate on inherited pension wealth as high as 67%.
The upside, and the reason the timing matters, is that expats who have cleared the 10-year threshold have planning options unavailable to UK residents. Once classed as a non-long-term resident, simply holding assets outside the UK can slash the bill. In the same worked example, selling the UK investment portfolio and reinvesting abroad cuts the liability from £232,000 to £144,000; selling the UK property as well takes it to zero. Some retirees also look at transferring pensions outside the UK, but that is a minefield — most transfers trigger the UK's Overseas Transfer Charge, so the sums only work for some people, and only with personalised advice.
Conventional tools still count: gifting within allowances, spousal transfers, exemptions and reliefs, and restructuring where UK-situated assets are held. None of these happens quickly. Reviews, restructuring and getting professional sign-off can take months, which is why advisers are urging people to start well before April 2027 rather than discovering the new bill after it is too late to act.
For British retirees living in Portugal — or planning to — this is one of those stories where an afternoon with a cross-border tax adviser could be worth more than any holiday saving. The rules may still change, and everyone's position differs, but the deadline itself is fixed.
