Pensions, Inheritance Tax, and Double Tax Treaties: What You Need to Know

With the UK budget announcement in the rearview mirror, now is the time for advisers to outline how these changes could impact you throughout the year ahead.

One major headline? Starting in April 2027, pensions will be brought into the inheritance tax (IHT) net.

This means that the value of your pensions upon your death will now be included with other assets when calculating your estate’s IHT liability.

Here’s the big picture:

• In the UK, estates above ￡325,000 (or ￡500,000 if leaving your home to a direct descendant) will see pension funds above that threshold taxed at 40%.
• For many families, this could have serious financial implications, with the government estimating the change will impact 8% of estates and raise ￡1.5bn by 2029/30.

What Does This Mean for GCC Residents? If you’re a UK national or expat living in GCC countries, the story is a little different—and potentially more favourable—thanks to double tax treaties.

In the UK, only 25% of a pension pot in a SIPP or Defined Contributions scheme is tax-free, with the remainder subject to income tax. However, under double tax treaties, you could withdraw your pension tax-free and either:

• Gift it
• Or place it into a structure that is IHT-efficient.

This approach tackles income tax while also minimising inheritance tax exposure.

The basis of it all is that if a double tax treaty exists, and you have a certificate of residence for tax purposes, it is possible to withdraw the entirety of a pension tax-free, provided the country of residence has a favourable personal income tax regime (as in the GCC) and either gift or place it into a structure that is UK IHT efficient.?

In this way, income tax can be ameliorated and UK IHT minimised.

Smart IHT Planning Strategies

Inheritance tax planning doesn’t need to be overwhelming. Here are some tried-and-tested strategies:

1. Gifting

• Gift ￡3,000 a year free from IHT.
• Make small, unlimited gifts of ￡250 to individuals.
• Larger gifts can fall outside the IHT scope if you survive seven years.
• Contributing to the living costs of relatives (e.g., a child’s rent) can also avoid IHT if it's from surplus income.

2. Trusts

• Bare trusts allow trustees to hold assets for beneficiaries until they turn 18.
• Discretionary trusts offer more flexibility to tailor rules to beneficiaries' needs.
• Consider a life insurance policy placed in trust to offset IHT liabilities.

?? Watch out: Trustees must evaluate holdings for IHT every 10 years, and a 6% tax could apply.

3. AIM-Listed Shares

Investing in AIM IHT Portfolios offers a 50% tax exemption if held for more than two years, reducing the effective IHT rate to 20%.

Final Thoughts

Navigating the complexities of IHT requires the guidance of a qualified adviser. For GCC residents, a Tax Residency Certificate (TRC) is crucial to benefit from double tax treaties.

• In the UAE, you must have been a resident for 180+ days.
• If you return to the UK within 5 years, you may face temporary non-resident rules, which could undo your tax advantages.

Don’t let these changes catch you off guard. With the right planning, you can protect your wealth for future generations.

Residency rules are a matter of adhering to strict rules set by both countries concerned and have their own idiosyncrasies within the GCC, something I’m experienced in navigating.?

Understanding which country has primary taxation rights is a key part of my role.

If you’re in need of support to make your finances work more for you and to help mitigate your task, feel free to get in touch.