They provide financial security in later life and, until now, they have also been one of the most effective estate planning tools, sitting largely outside of the UK Inheritance Tax (IHT) framework.

That position is changing - and for British expatriates living in Portugal, the implications are significant. Recent announcements from the UK Government mean that, from April 2027, most unused pension funds will fall within the IHT net. For many families, this could mean that pensions - often assumed to be safe from taxation on death - become subject to IHT of up to 40%

This article explains the reforms, their interaction with Portugal’s tax system, and the planning steps you may wish to consider.

A shift in UK IHT – From domicile to residency

Traditionally, UK IHT liability has been based on an individual’s domicile. This meant that even if you had lived outside the UK for many years, your worldwide assets could still be subject to IHT if you were deemed domiciled in Britain.

From 6 April 2025, this test changes. IHT will instead be determined by residency. In practical terms:

If you have been resident outside the UK for 10 of the past 20 years, your non-UK assets will no longer fall within the scope of UK IHT.

If you remain UK resident or return within that 20-year window, HMRC retains a claim on your worldwide estate.

The 2027 Pension Reform – Pensions pulled into the IHT net

Currently, pensions are treated very favourably under the UK system. Unused pension funds typically sit outside of the estate for IHT purposes making pensions one of the most effective wealth transfer vehicles.

From 6 April 2027, this exemption ends:

Unused pension funds will be included within the estate for IHT purposes.

This applies to benefits taken as lump sums, through beneficiary drawdown accounts, or via annuities.

Even bypass trusts - often used to pass pension wealth efficiently - will fall within the IHT framework.

The spousal exemption will still apply, which means that any assets, including the unused pension fund, will pass to your spouse free of IHT. However, when the pension fund passes to someone else (eg children), IHT will be payable.

The proposed legislation proposes that the responsibility for paying IHT will rest with:

(1) The Legal Personal Representatives (LPR)s who can pay the IHT from the deceased’s estate.

(2) The pension beneficiaries, who can ask the scheme administrator to pay it from the pension fund. However, if the member was over age 75 at the date of death, then the beneficiaries will have to pay income tax on the withdrawal at their marginal (highest) rate of tax. If a beneficiary’s marginal rate is 45%, this would increase the effective tax rate to 67%.

Alternatively, the beneficiaries can pay it out of their own funds.

The effect is clear: pensions are no longer outside the reach of HMRC. Instead, they join property, investments, and other assets as part of the estate - potentially subject to a 40% tax charge.

Portugal’s position – Why the UK rules still matter

Portugal itself does not impose inheritance or estate tax. Instead, a modest stamp duty applies in limited situations, and transfers between spouses, children, and parents are generally exempt.

For UK expats, this means the challenge is not Portuguese taxation, but UK law. Because pensions held in the UK are classified as UK-sited assets, they remain within HMRC’s reach regardless of where you live.

This is particularly important for retirees in Portugal who may have structured their affairs assuming that pensions were IHT-proof.

Credits: Supplied Image; Author: Client;

Planning considerations – What you should be doing now

The reforms create both risks and opportunities. By acting before April 2027, you can take steps to mitigate IHT exposure and protect your family’s legacy.

Here are some key actions British expat in Portugal may wish to consider:

Review pension exposure
Take stock of your UK pensions and Assess how much could be exposed to IHT from 2027.

Model your estate
Work with an adviser to model your estate under the new rules. Which assets will fall inside UK IHT? Which are outside?

Explore alternative structures
Consider whether reallocating part of your wealth into other vehicles - could reduce your exposure while ensuring compliance in Portugal.

Review succession arrangements
Check that your wills, beneficiary nominations, and trust structures remain effective under the new rules. Cross-border coordination between UK and Portuguese advisers is essential.

Act within the window
Although the new residency rules are already in force, the new IHT rules will not be in place until April 2027, so there is still time to plan. However, there is also an opportunity. By combining Portugal’s relatively benign inheritance regime with forward-looking UK planning, it is possible to shield significant wealth from unnecessary taxation.

At Blacktower, we have been supporting expatriates in Portugal for nearly 40 years. We specialise in navigating the complexities of cross-border financial planning.

If you are a British expat in Portugal concerned about the impact of IHT on your pensions, speak to our team today.

info@blacktowerfm.com

www.blacktowerfm.com

John Westwood,

Group Chairman, Blacktower Financial Management