The position is now enacted. Finance Act 2026 received Royal Assent on 18 March 2026 and brings most unused pension funds and pension death benefits into the Inheritance Tax estate for deaths on or after 6 April 2027. A member who dies before that date remains under the current rules, even if the scheme pays benefits later.
This is a material change for private clients with substantial Self Invested Personal Pensions. It is not, however, a universal 40 per cent charge on every pension. Liability depends on the complete estate, the member’s long term UK residence position, where the scheme is established, the beneficiaries, available exemptions and the type of benefit. The correct response is an estate wide review, not a single product transaction.
What Finance Act 2026 Changes
HMRC describes the pension value brought into account as notional pension property. For a money purchase arrangement, this will generally include the value available to provide death benefits immediately before death. Trustee discretion over the choice of beneficiary will no longer keep that value outside the estate.
The reform has defined limits. HMRC’s technical note on Inheritance Tax and pensions confirms exclusions for qualifying dependant scheme pensions, qualifying joint life annuities and death in service benefits. Existing exemptions for benefits passing to an eligible spouse, civil partner or charity also continue. These distinctions are why a gross pension balance cannot simply be multiplied by 40 per cent to estimate the liability.
The estate may use its available nil rate band and other reliefs across all relevant assets. Pension property is added to that wider calculation. The eventual liability therefore depends on the pension, the rest of the estate and how exempt and non exempt benefits are allocated.
Who Reports and Pays
Personal representatives will be responsible for reporting the pension property and will be liable for the associated Inheritance Tax. Once pension property is vested in a beneficiary, that beneficiary becomes jointly and severally liable with the personal representatives for tax attributable to that property.
Pension scheme administrators will not normally bear the primary liability. Finance Act 2026 establishes withholding and direct payment duties for administrators of registered schemes and makes an administrator jointly liable if it fails to act on a valid notice. HMRC’s May 2026 technical note says secondary legislation will set the information sharing requirements, while evidence standards, notice templates and detailed guidance will follow before April 2027. Valuation, timing and notice mechanics should therefore be checked against the final materials.
The Act establishes a framework under which personal representatives can ask a registered pension scheme to withhold part of a non exempt beneficiary’s entitlement where tax may be due. A valid payment notice can require the scheme to pay the relevant tax to HMRC from benefits that remain available. This is an administrative mechanism, not a rule that automatically deducts 40 per cent from every pension before distribution.
Residence Replaced Domicile as the Threshold Test
From 6 April 2025, the former domicile and deemed domicile framework was replaced for these purposes by long term UK residence rules enacted through Finance Act 2025. HMRC’s long term residence guidance states that an individual is generally a long term UK resident after residence in the United Kingdom for at least 10 of the previous 20 tax years.
The position can continue after departure. The period is generally three tax years for someone who was UK resident for 10 to 13 of the previous 20 tax years, then increases by one year for each additional year of residence, up to a maximum of 10 tax years. Transitional provisions can change the result for individuals who were not resident in the 2025 to 2026 tax year.
For a long term UK resident, notional pension property in UK registered schemes, qualifying non UK pension schemes and section 615(3) schemes can be within scope regardless of where the scheme is established. For someone who is not a long term UK resident, HMRC says pension property in a scheme established in the United Kingdom can still be within scope, while a qualifying scheme established outside the United Kingdom is generally outside scope. A UK SIPP therefore does not cease to be relevant merely because its member has lived in the UAE for many years.
The first question is not whether the individual remains UK domiciled. It is whether the individual is a long term UK resident under the post April 2025 rules and where each pension scheme is established.
Why Drawdown Is Not an Automatic IHT Solution
Drawing money from a SIPP changes the legal form of the asset. It does not make the value disappear. Cash and investments held after a withdrawal remain part of the individual’s estate unless a separate rule or relief applies.
Article 17 of the United Kingdom and UAE Double Taxation Convention generally assigns private pension income paid to a treaty resident to the state of residence. Treaty relief is not automatic evidence that every withdrawal will be paid without United Kingdom withholding. The individual must establish treaty residence, distinguish private pensions from government service benefits and follow the applicable HMRC and provider process.
A withdrawal can create planning capacity if the proceeds are genuinely spent during retirement or transferred under a valid lifetime gifting strategy. Gifts require their own analysis, including the seven year rules, reservation of benefit, recipient risk and the donor’s continuing liquidity needs. A withdrawal followed by reinvestment in the same individual’s name normally changes the wrapper rather than the estate value.
ISAs Do Not Sit Outside the Estate
An ISA provides relief from United Kingdom Income Tax and Capital Gains Tax within the ISA rules. It is not an Inheritance Tax exemption. GOV.UK guidance for an ISA after death states expressly that ISA investments form part of the estate for Inheritance Tax purposes.
Moving a SIPP withdrawal into an ISA can alter the income and gains treatment of future investment returns, where the individual is eligible to subscribe. It does not remove the capital from the estate. GOV.UK ISA guidance also confirms that an individual must generally be resident in the United Kingdom to subscribe, subject to limited Crown employee exceptions.
Contributions Must Be Judged on Their Own Merits
Further personal pension contributions may still be valuable for retirement funding and Income Tax relief. They should not be marketed as a response that reduces the new pension Inheritance Tax exposure. GOV.UK pension contribution guidance confirms that relief on personal contributions is constrained by relevant United Kingdom earnings and the annual allowance. Employer contributions follow a different analysis. Separate restrictions can apply to high earners and people who have flexibly accessed pensions. The retirement and Income Tax case must be modelled separately from the estate case.
QROPS Is Not a Blanket Escape
A transfer to a Qualifying Recognised Overseas Pension Scheme can change the regulatory, currency and investment framework. It does not automatically remove the pension from the new Inheritance Tax rules. HMRC’s technical note confirms that qualifying non UK pension schemes are within scope for a long term UK resident.
A transfer can also face the 25 per cent Overseas Transfer Charge. The broad EEA and Gibraltar exclusion ended for transfers made on or after 30 October 2024. HMRC’s current overseas transfer measure retains a same country exclusion where the member is resident in the country in which the receiving QROPS is established, subject to the detailed conditions and the overseas transfer allowance.
The charge can arise later if the condition supporting an exclusion ceases to be met during the relevant period. HMRC also warns that appearance on the ROPS notification list is not a guarantee that a scheme qualifies or that a transfer will be free of United Kingdom tax. Advice must address the receiving scheme, transfer charge, later residence changes, fees, access rules and the member’s Inheritance Tax status together.
A Decision Framework for UAE Residents
A defensible review starts with facts rather than a preferred product. We would expect the professional team to establish the following:
- Whether death would occur before or after the 6 April 2027 commencement date.
- The individual’s UK residence history for each of the previous 20 tax years and any transitional treatment.
- Whether each pension is a United Kingdom established registered scheme, a qualifying non UK scheme or another arrangement.
- The value and type of each death benefit, including any excluded benefit and any payment to an exempt beneficiary.
- The complete estate, available nil rate bands, lifetime gifts, liquidity needs and succession objectives.
- The Income Tax and treaty treatment of any proposed withdrawal, including the administrative route for obtaining relief.
- For any overseas transfer, the QROPS status, Overseas Transfer Charge, overseas transfer allowance and consequences of a later residence change.
The output should compare keeping the pension, drawing only what retirement spending requires, making carefully structured lifetime gifts, and any regulated transfer option. It should show the effect on the individual as well as beneficiaries. No option should be selected solely because it changes the label on the asset.
What Private Clients Should Do Now
The enacted change justifies a review before April 2027, but it does not justify rushed withdrawals or transfers. Scheme valuations, residence history and beneficiary nominations should be assembled first. The estate model can then be tested under the current rules and the rules applying to deaths from 6 April 2027.
This review should be coordinated among an appropriately regulated United Kingdom pension adviser, a cross border tax adviser and succession counsel. Growth Capital does not provide pension, tax or legal advice. Any pension decision should remain consistent with the private client’s residence position, investment plan, liquidity requirements and wider estate architecture.
Primary sources: Finance Act 2026; HMRC technical note on Inheritance Tax and pensions; Finance Act 2025; HMRC long term residence guidance; GOV.UK ISA estate guidance; HMRC overseas transfer measure; and the United Kingdom and UAE Double Taxation Convention. This article is informational and does not constitute pension, tax or legal advice. Private clients should obtain advice from appropriately regulated professionals before acting.