A Qualifying Recognised Overseas Pension Scheme currently escapes UK inheritance tax in most cases because the funds sit in a discretionary trust rather than in your personal estate. That protection ends on 6 April 2027. From that date, most unused pension funds, including those held in qualifying non-UK pension schemes, will be brought into the taxable estate at a rate of up to 40%.1GOV.UK. Inheritance Tax on Unused Pension Funds and Death Benefits If you hold a QROPS, the planning you did under the old framework may no longer work the way you expected.
Why QROPS Funds Currently Sit Outside Your Estate
Under the Inheritance Tax Act 1984, your estate is the total of all property you are beneficially entitled to at the moment of death. Death benefits held in a QROPS are typically controlled by the scheme trustees or administrators under a discretionary trust. Because you do not have outright beneficial ownership of those funds, the pension falls outside your estate and is not counted for inheritance tax.2GOV.UK. Inheritance Tax – Unused Pension Funds and Death Benefits
The word doing the work here is “discretionary.” Most schemes let you file an expression of wishes naming preferred beneficiaries, but the final decision rests with the trustees. Because you cannot legally compel a specific payout, HMRC treats the funds as outside your control and therefore outside your taxable estate. Where a scheme instead gives you an absolute right to direct benefits to a named person with no trustee oversight, that argument collapses and the funds fall into the estate.
For someone who is not UK domiciled, overseas pension assets may separately qualify as excluded property, keeping them outside the UK inheritance tax net even where there was some UK connection.3GOV.UK. How Inheritance Tax Works: When Someone Living Outside the UK Dies Domicile is a separate question addressed below.
What Changes on 6 April 2027
The Autumn Budget confirmed that from 6 April 2027, most unused pension funds and pension death benefits will be included in the value of the member’s estate for inheritance tax purposes. This applies to registered UK pension schemes, qualifying non-UK pension schemes (which covers QROPS), and certain older statutory schemes. The change applies whether or not the scheme trustees have discretion over how death benefits are paid.1GOV.UK. Inheritance Tax on Unused Pension Funds and Death Benefits
The mechanism is a new provision in the Inheritance Tax Act 1984 that deems the member to be beneficially entitled to pension property held for them immediately before death. That deeming overrides the discretionary-trust argument that currently keeps pensions outside the estate. Draft legislation published through Finance Bill 2025-26 makes this explicit for qualifying non-UK pension schemes.4GOV.UK. Draft Legislation Reforming Inheritance Tax Unused Pension Funds and Death Benefits
What the Reform Does Not Touch
Two categories stay outside inheritance tax after April 2027:
- Death-in-service lump sum benefits from group life cover provided through pension schemes.
- Ongoing dependants’ pensions paid from defined benefit or collective money purchase arrangements.
The existing spouse, civil partner, and registered charity exemptions also continue to apply.2GOV.UK. Inheritance Tax – Unused Pension Funds and Death Benefits A QROPS member leaving pension funds to a spouse or civil partner will still pay no inheritance tax on that portion of the estate.
Thresholds and Rates That Will Apply
Inheritance tax is charged at 40% on the value of the estate above the nil rate band of £325,000. A separate residence nil rate band of £175,000 is available when a home passes to direct descendants such as children or grandchildren. Both thresholds are frozen at these levels until April 2030.5GOV.UK. Inheritance Tax Thresholds and Interest Rates
Where at least 10% of the net estate goes to a UK charity, the rate on the taxable portion drops to 36%.6GOV.UK. Technical Note: Inheritance Tax on Pensions From April 2027, the value of unused QROPS funds is added to the rest of your estate before those thresholds are applied. For a member with a sizeable pension pot alongside property and other investments, the combined total can push well past the nil rate band and produce a substantial tax bill where none would have existed before.
The Income Tax Overlay on Inherited QROPS Benefits
Even before the 2027 reform, inherited pension benefits can carry an income tax charge depending on the member’s age at death. If the pension holder dies before 75, most lump sums and drawdown payments to beneficiaries are free of income tax, provided they sit within the lump sum and death benefit allowance. If the holder dies at 75 or older, all death benefit payments are taxed as income in the beneficiary’s hands.7GOV.UK. Tax on a Private Pension You Inherit
From April 2027, the same pot could face inheritance tax at 40% and income tax on the remainder. The government has built in a mitigation: the portion of pension benefits that corresponds to the inheritance tax paid will not count toward the beneficiary’s taxable income. In practice, either the personal representatives or the pension beneficiaries can arrange for the inheritance tax to be paid directly from the pension fund before benefits are released, reducing the income tax base.6GOV.UK. Technical Note: Inheritance Tax on Pensions
Personal representatives will also be able to issue a withholding notice to the pension scheme administrator, instructing them to hold back up to 50% of the pension funds for up to 15 months from the date of death while the inheritance tax position is finalised. The inheritance tax payment deadline remains six months after the date of death.
The Domicile Trap for Long-Term UK Residents
Domicile is a legal concept separate from residency. It refers to the country you treat as your permanent home. Under UK tax rules, anyone who has been resident in the UK for at least 15 of the previous 20 tax years is treated as “deemed domiciled,” which allows HMRC to tax the worldwide estate on death regardless of where the person is physically living.8GOV.UK. Deemed Domicile Rules
This matters for anyone holding a QROPS. Someone who has genuinely emigrated and is not UK domiciled can benefit from excluded-property treatment on overseas assets, including overseas pensions. Someone who spent a long career in the UK before retiring abroad may have crossed the 15-year threshold without realising. Once deemed domiciled, the worldwide estate, including the QROPS, is potentially within UK inheritance tax.
After the 2027 reform, the combination gets sharper. A deemed-domiciled individual with a large QROPS will have those pension assets treated as part of the estate and taxed at 40% above the nil rate band. The reliable protections are the spousal exemption and the charity exemption. If you have spent substantial time in the UK, track your residency years and take professional advice before assuming your overseas pension is out of HMRC’s reach.
What to Check Before April 2027
The size of the pot matters more than it used to. A QROPS that would have passed to your children outside the estate under the current rules will, from April 2027, be added to everything else you own before the £325,000 nil rate band and any residence nil rate band are applied. If you are married or in a civil partnership, leaving pension funds to your spouse still avoids the charge on that portion. Charitable bequests remain exempt and can pull the rate on the rest of the estate down to 36% if they reach the 10% threshold. Age at death still drives the income tax treatment for beneficiaries, and the new rules include a mechanism to stop the same money being taxed twice on the same pound. Domicile status is the single variable most likely to catch out expats who assumed distance from the UK was enough.