UK Pensions and Inheritance Tax: What Mallorca's Expat Families Need to Know Now

In short: From April 2027 unused pension savings in the UK will be counted when determining the estate value for UK inheritance tax. This is especially relevant if you hold a SIPP or similar products. In practice this means funds that were previously excluded now increase the taxable estate. For families this can mean that previous allowances are quickly exceeded and heirs must pay significantly more. I often explain this in consultations in Santa Ponsa and Palma: the reaction is usually the same — surprise. Some details make the difference: the deceased's age (under or over 75), how the benefit is paid (lump sum or recurring pension), and whether tax-free withdrawals have been made earlier. Heirs who opt for a lump sum may, in addition to inheritance tax, also pay income tax on the amount, depending on the amount and age. If the payment is treated as pension income and the deceased was over 75, income tax applies, otherwise often not. There is no one-size-fits-all guide because life situation, residence status, assets in Spain and existing wills play a role. Therefore a focused cross-border consultation is worthwhile now: check amounts, pension types, will formats and whether transfers or trust solutions make sense. Small early steps (e.g. updating beneficiary details, obtaining NT codes from HMRC or updating powers of attorney) are often easier than you think and can save a lot later.

In short: From April 2027 unused pension savings in the UK will be counted when determining the estate value for UK inheritance tax. This is especially relevant if you hold a SIPP or similar products. In practice this means funds that were previously excluded now increase the taxable estate. For families this can mean that previous allowances are quickly exceeded and heirs must pay significantly more. I often explain this in consultations in Santa Ponsa and Palma: the reaction is usually the same — surprise. Some details make the difference: the deceased's age (under or over 75), how the benefit is paid (lump sum or recurring pension), and whether tax-free withdrawals have been made earlier. Heirs who opt for a lump sum may, in addition to inheritance tax, also pay income tax on the amount, depending on the amount and age. If the payment is treated as pension income and the deceased was over 75, income tax applies, otherwise often not. There is no one-size-fits-all guide because life situation, residence status, assets in Spain and existing wills play a role. Therefore a focused cross-border consultation is worthwhile now: check amounts, pension types, will formats and whether transfers or trust solutions make sense. Small early steps (e.g. updating beneficiary details, obtaining NT codes from HMRC or updating powers of attorney) are often easier than you think and can save a lot later.

Heirs need to keep two things in mind: inheritance tax (IHT) and possible income tax on benefits received. For lump-sum payments, income above certain thresholds can become subject to income tax; for pension payments tax liability depends largely on the deceased's age. In practice this means children who receive a larger payout should speak to their tax adviser early to review payment deadlines, installment arrangements and possible double taxation treaties between Spain and the UK. In Mallorca there are advisers who regularly work with British rules — look for someone with cross-border experience.

What can you do today? 1) Get an overview: current values of your UK pensions, accounts and properties. 2) Check beneficiary details with pension providers and update your will — preferably with a version under Spanish law alongside the UK will. 3) Obtain documents from HMRC (e.g. NT code) in good time; this often takes months. 4) Talk to a cross-border tax or wealth adviser — a short meeting in Palma or a call with prepared documents is often enough for the first steps. 5) Consider whether restructurings (e.g. transfers, trusts or offshore transfers) make sense in your situation, but only after professional review. I recommend not waiting: whenever I talk to people in Mallorca about this, the biggest brake is the assumption that there are still years left. In retirement years pass quickly. A few hours of planning now can help your family substantially later.