Inheritance tax wake-up call for all expat Brits | Australian Markets
A significant tax change within the UK may have severe penalties for hundreds of British expats dwelling in Australia with pension financial savings left behind within the outdated nation.
From April 2026, pension pots inherited after the age of 75 will no longer be tax-free for beneficiaries. Instead, they’ll be taxed as income, on the recipient’s marginal charge — doubtlessly as high as 45 per cent..
And from April 2027, the UK goes a step additional — pensions will likely be introduced into the scope of inheritance tax, too.
This 2027 change is a recent transfer from the UK Treasury. Pensions, which have been beforehand exempt from UK property taxes, will now doubtlessly face double taxation — income tax plus inheritance tax.
If you’re an Australian tax resident with a UK pension and also you’re assuming it’ll all go seamlessly to your loved ones at some point, then suppose again.
So, what’s altering?
Historically, UK outlined contribution pensions — often known as “private pensions” — have been a useful property planning instrument. If the pension holder died earlier than age 75, the whole pot may go to beneficiaries tax-free, and even after 75 it was solely subject to income tax when withdrawn.
More importantly, pensions have been excluded from the property for UK inheritance tax functions, that means they averted the UK’s hefty 40 per cent property tax altogether.
But from April 2026, that income tax exemption ends for people who die over age 75. And from April 2027, the pension itself will likely be counted as half of the property for inheritance tax functions.
The UK authorities has confirmed that from April 2027, outlined contribution pensions will likely be reportable for inheritance tax, with the accountability falling on executors. In some circumstances, households may have simply six months to report and pay tax or face late penalties.
If that appears like a nightmare for grieving households navigating two tax systems, it’s as a result of it in all probability will likely be.
Australian vs UK tax therapy
In distinction, Australian superannuation is comparatively beneficiant in relation to property planning as a result of:
- Superannuation death advantages paid to dependants (reminiscent of a partner) are usually tax-free.
- Even when paid to grownup kids (non-dependants), the tax is usually capped at 17 per cent, though will be up to 32 per cent or doubtlessly as low as zero relying on the taxable part of the fund.
- Binding death benefit nominations and different instruments give Australians more control and certainty in how wealth is handed on.
Residence guidelines: The hidden entice
Adding additional complexity is a lesser-known change to how the UK defines inheritance tax publicity.
From April 6 this 12 months, the UK moved to a residence-based system. If you’ve been a UK tax resident for 10 out of the final 20 tax years, it’s possible you’ll be categorised as a long-term resident and subject to UK inheritance tax in your worldwide belongings.
So, even should you’ve been dwelling in Australia for years, you should still be caught by UK inheritance tax, as a result of the new guidelines apply a “tail” period of up to 10 years after you allow.
What are you able to do about it?
For many, transferring UK pensions to Australia through a Qualifying Recognised Overseas Pension Scheme has for a long time — and in the suitable circumstances — made financial sense. It consolidates retirement financial savings, aligns your money along with your tax residency and offers you more control.
Now, with the emergence of this new tax regime, the argument for a switch grows stronger.
It additionally removes the burden from your loved ones of having to deal with HM Revenue and Customs, complicated executor tasks and worldwide tax reporting.
Things to keep in thoughts
Of course, it’s not all the time easy as a result of:
- Not all UK pensions are eligible for switch (particularly outlined benefit schemes).
- You could face exit charges or require financial advice from a UK Financial Conduct Authority-registered adviser.
- Not all Australian super funds are QROPS-compliant.
- It is just not attainable to switch a UK pension to Australia till age 55.
- Timing issues — notably for these close to the age cap (often 75).
But with skilled advice, the method can typically be navigated easily and the long-term advantages will be important.
The backside line
The UK’s deliberate tax modifications are a wake-up call for British expats in Australia as a result of:
- From 2025, long-term UK residents could face inheritance tax on worldwide belongings.
- From 2026, inherited pensions will no longer be income tax free.
- From 2027, pensions will likely be included in UK estates, with complicated reporting necessities.
So, you probably have UK pension financial savings and dwell in Australia, it’s time to reassess your strategy.
A well-considered pension switch, in the suitable circumstances and with the suitable personalised advice, may imply more of your hard-earned financial savings keep within the fingers of your loved ones — and never within the UK tax workplace.
Nicholas Hart is a financial adviser and UK Pensions professional at Empire Financial Group
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