UK Inheritance Tax on Pensions 2027: US Citizens' Guide

From 6 April 2027 unused pension funds and most lump sum death benefits are brought inside the deceased's estate for UK inheritance tax. For an American living in Britain that means a SIPP, and in many cases a 401(k) and an IRA, can face 40% UK inheritance tax and US federal estate tax on the same capital, with treaty credit the only bridge between them.

This guide sets out the UK inheritance tax on pensions 2027 US citizens should be modelling now: how the charge is calculated, which American retirement accounts are actually caught, what personal representatives must report before probate is granted, and how the 1978 US-UK estate and gift tax convention resolves — or fails to resolve — the overlap. At Jungle Tax we are already rebuilding estate models for dual-qualified families on this basis, because the planning window closes long before the rule does.

What actually changes on 6 April 2027?

Until now, UK pensions have been the most efficient wrapper in the country for passing wealth down. Money held in a defined contribution scheme under a discretionary trust — which is how almost every SIPP and workplace scheme is written — has sat outside the member's estate. Trustees exercise a discretion over who receives the death benefit, so the member never held a transmissible property right in it, and inheritance tax never bit. That is why sophisticated advisers have spent a decade telling clients to spend the ISA, spend the general investment account, and leave the pension untouched.

From 6 April 2027 that logic inverts. Unused pension funds and death benefits become part of the chargeable estate on death, taxed alongside the house, the portfolio and the business interest. The consequences are structural rather than incremental:

• The pension is aggregated with everything else, so it consumes the nil-rate band and pushes the rest of the estate up the scale.
• Estates that were comfortably below the taper threshold on non-pension assets alone can be dragged above it once a seven-figure SIPP is added.
• The residence nil-rate band, which tapers away for larger estates, is far more easily lost once pension value is counted.
• Liquidity planning changes completely — the tax falls due before the beneficiaries can necessarily access the fund.

Certain categories were carved out of the change. Death in service benefits paid from registered schemes, dependants' scheme pensions and annuities, and death benefits paid to a charity are outside the new charge. Everything else that sits as an unused fund on the member's death is, in principle, inside it. HMRC's general framework for inheritance tax remains as set out in its Inheritance Tax Manual and the public guidance at gov.uk/inheritance-tax.

Why is a US citizen's estate exposed twice?

Almost every other estate faces one death tax authority. An American in London faces two, for reasons that have nothing to do with each other and everything to do with each other's timing.

The UK side turns on long-term residence, not domicile

Since 6 April 2025 the UK has abandoned domicile as the connecting factor for inheritance tax. The test is now long-term residence: broadly, once an individual has been UK resident for ten out of the previous twenty tax years, their worldwide assets fall within the UK inheritance tax net. There is a tail period after departure that scales with the length of prior residence, so leaving does not switch the exposure off immediately.

For a US citizen who has built a career in London, this is the decisive fact. Once long-term resident status is reached, the 401(k) left behind in Chicago and the rollover IRA at a US custodian are within scope of UK inheritance tax on exactly the same footing as the SIPP built up since arrival. We look at this interaction constantly in our cross-border tax planning work, and it is routinely the point clients have not modelled.

The US side turns on citizenship, and never lets go

The United States taxes the worldwide estate of every citizen and green card holder regardless of where they live, where the assets sit, or how long they have been abroad. Renouncing does not necessarily solve it either — covered expatriates face their own regime. The federal estate tax rate is 40% above the available exclusion, and the exclusion is generous by international standards but not unlimited; large pension balances combined with US real estate, concentrated equity and life policies written badly can exceed it faster than clients expect. The IRS sets out the framework at irs.gov estate tax, with the return itself described at About Form 706.

Is a 401(k) or IRA caught by UK inheritance tax?

This is the question we are asked more than any other, and the honest answer is that many US retirement accounts were arguably already exposed — the 2027 change simply removes any remaining doubt and closes the comparison with UK schemes.

The distinction is the nature of the member's right. A UK discretionary death benefit gave the member no property to pass on; the trustees decided. A traditional IRA is different. The account is the owner's property, the beneficiary designation operates as a testamentary direction, and the balance passes because the owner directed it. A 401(k) sits somewhere in between depending on plan documentation, spousal consent rules under ERISA and the precise terms of the beneficiary designation. From 6 April 2027, when unused UK funds are dragged into the estate anyway, the analytical difference stops mattering for a long-term resident: the value is in the estate either way.

Vehicle	Position before 6 April 2027	Position from 6 April 2027 (long-term UK resident)
UK SIPP or personal pension (discretionary death benefit)	Outside the estate; passed free of inheritance tax	Unused fund inside the chargeable estate
UK workplace defined contribution scheme	Outside the estate under scheme discretion	Unused fund inside the chargeable estate
Traditional IRA / Roth IRA	Frequently already estate property by virtue of the owner's right and beneficiary designation	Inside the chargeable estate; valued at date of death
401(k) / 403(b)	Depends on plan terms and the nature of the member's entitlement	Inside the chargeable estate as an unused fund
Death in service from a registered scheme	Outside the estate	Remains outside the new charge
Dependants' scheme pension or annuity income	No capital value in the estate	Remains outside the new charge
Death benefit paid to charity	Exempt	Remains exempt

How do the two systems tax the same pot?

The mechanics diverge at almost every point — the connecting factor, the valuation date, the rate, the reliefs, and above all the person who is legally liable. Understanding that divergence is what makes the treaty credit work rather than fail.

Feature	UK — HMRC (from 6 April 2027)	US — IRS
Connecting factor	Long-term residence (broadly 10 of the previous 20 tax years)	Citizenship or green card status, worldwide and permanent
What is taxed	The estate as a whole, including unused pension funds	The gross estate of the decedent, including retirement accounts
Headline rate	40% above available bands	40% above the available exclusion amount
Principal allowance	Nil-rate band, plus residence nil-rate band where the qualifying conditions are met and no taper applies	Basic exclusion amount, plus portability of a deceased spouse's unused exclusion
Spouse relief	Unlimited between spouses both within the UK long-term residence net; capped where the surviving spouse is outside it	Unlimited marital deduction only where the surviving spouse is a US citizen; otherwise a QDOT is required
Who is liable	Personal representatives, who must report and settle before distribution	The estate, through the executor filing Form 706
Income tax interaction	Beneficiary may pay income tax on drawdown where death occurred after age 75	Retirement accounts are income in respect of a decedent, taxed to the beneficiary as distributed
Relief for the other country's tax	Unilateral and treaty double taxation relief	Treaty credit, or the foreign death tax credit under domestic law

The stacking problem nobody budgets for

The 2027 change does not alter the income tax treatment of inherited UK pensions. Where the member dies at or after age 75, beneficiaries continue to pay income tax at their marginal rate on what they draw. Layering a 40% inheritance tax charge on top of income tax on the residue produces a combined effective rate that, for an additional rate beneficiary, can approach two thirds of the fund.

Now add the American dimension. A US citizen beneficiary drawing on an inherited UK pension has a US income tax exposure on those distributions as well, mediated by the pensions article of the US-UK income tax treaty and constrained by the saving clause, which preserves the United States' right to tax its own citizens. A US beneficiary of an inherited traditional IRA faces income in respect of a decedent treatment and, for most non-spouse designated beneficiaries, a ten-year window in which the account must be emptied — often colliding with their peak earning years.

The practical result for a dual-exposed family is three separate charges on one pot: UK inheritance tax on the capital, US estate tax on the same capital subject to credit, and income tax to the beneficiary on the distributions. Each is calculated by a different authority on a different base. None of them automatically knows about the others. Modelling this properly is core to the work we do for high net worth households.

What must personal representatives do before probate?

This is where the 2027 reform becomes an administrative problem rather than a purely fiscal one, and where cross-border estates get stuck.

The reporting burden sits with the personal representatives

After consultation, the government confirmed that liability for reporting and paying inheritance tax on unused pension funds rests with the personal representatives of the estate rather than with pension scheme administrators. In practice that means the PRs cannot simply value the house and the investment portfolio and apply for the grant. Before the inheritance tax account can be completed they must:

• Identify every pension arrangement the deceased held, in both countries, including preserved deferred pots from former employers.
• Obtain a date-of-death valuation from each scheme administrator or US plan custodian, in the correct currency and at the correct exchange rate.
• Establish which benefits fall inside the new charge and which are carved out.
• Determine the correct apportionment of the available nil-rate band across estate assets and pension funds.
• Report the pension values on the inheritance tax account alongside the rest of the estate.
• Pay the tax, or arrange for it to be paid, before the grant of representation is issued.

For an American estate this list is materially harder. A US plan custodian has no obligation to understand a UK inheritance tax account, no template for date-of-death reporting in the HMRC format, and no incentive to respond quickly to a British executor. We routinely see three to six months lost simply obtaining usable valuations from US institutions, which is why we press clients to document their pension architecture in advance through our private client tax services.

Can the tax be paid out of the pension itself?

Yes, and this matters enormously for liquidity. The government has confirmed a route by which beneficiaries can direct the pension scheme to pay the inheritance tax attributable to the pension directly to HMRC out of the fund, rather than forcing the personal representatives to find the cash from elsewhere in the estate. Without that mechanism, an estate consisting of a family home and a large SIPP would face an inheritance tax bill it could only meet by selling the house.

The government also indicated a softening on late payment interest for the pension element specifically, recognising that PRs may be waiting on scheme information beyond the normal six-month payment window. The precise operation of that concession — and whether a foreign scheme's slow response counts — should be confirmed against the final legislation before anyone relies on it.

How does the US-UK estate tax treaty credit actually resolve the overlap?

The 1978 Convention between the United States and the United Kingdom on estate, inheritance and gift taxes is a genuinely useful instrument, and it is badly understood. It does not exempt anything. What it does is decide which country has the primary claim and then require the other to give credit, so that the total burden approximates the higher of the two rather than the sum.

Step one: establish fiscal domicile under the treaty

The convention has its own domicile concept with a tie-breaker sequence, applied where an individual would otherwise be domiciled in both states. It looks at permanent home, centre of vital interests, habitual abode and nationality, in a structure familiar from income tax treaties. There is also a rule that protects individuals who are in one country for a limited number of years from being treated as domiciled there. Getting this determination right is the single highest-value step in the analysis, because everything downstream depends on it.

Step two: apply the situs and credit rules

Once fiscal domicile is settled, the convention allocates taxing rights by asset category. Immovable property is taxable where it sits. Business property of a permanent establishment follows the establishment. Most other property, including pension rights, is generally taxable only in the state of the decedent's treaty domicile — with the crucial caveat that the United States reserves the right to tax its citizens under the convention's saving provision. That reservation is exactly why the credit article exists: the treaty then requires the United States to credit UK inheritance tax paid on property the UK was entitled to tax.

Applied to our facts, the typical pattern for a long-term UK resident American is:

• The UK charges inheritance tax on the worldwide estate, including SIPP, 401(k) and IRA, from 6 April 2027.
• The United States charges estate tax on the same worldwide estate by reason of citizenship.
• The convention, supported where necessary by the domestic foreign death tax credit, allows a credit for the UK tax against the US liability on the same property.
• Because the UK rate is 40% and the US rate is 40%, but the UK exclusion is far smaller, the credit frequently absorbs the entire US liability — the estate pays UK tax and files a US return showing little or no additional US tax.

That outcome is common but not automatic. It depends on the credit being claimed correctly, within the statutory time limits, with evidence of foreign tax paid, and on the two estates being valued consistently. Where the decedent's treaty domicile is the United States rather than the United Kingdom, the direction of the credit reverses and HMRC's double taxation relief guidance becomes the operative framework.

The often-missed income tax deduction

Separately from the estate tax credit, a US beneficiary who inherits an IRA or 401(k) that suffered US federal estate tax may claim an income tax deduction for the estate tax attributable to that income in respect of a decedent. It is one of the most frequently overlooked reliefs in cross-border estate administration, and it can be worth six figures on a large account. It requires the estate tax computation to have been done properly in the first place — another reason the two filings must be prepared together rather than by unconnected advisers on each side of the Atlantic.

Which exemptions survive the change?

The spouse exemption, and the two traps in it

Transfers to a spouse remain exempt from UK inheritance tax, and a pension death benefit paid to a surviving spouse should therefore attract that exemption in the same way as any other asset. Two traps follow. First, if the surviving spouse is outside the UK long-term residence net, the exemption is capped rather than unlimited. Second, on the American side the unlimited marital deduction is available only where the surviving spouse is a US citizen; where they are not, the assets must generally pass into a qualified domestic trust to defer the charge.

For an Anglo-American couple — one US citizen, one British — this is the combination that produces genuinely unpleasant surprises. The exemption analysis has to be run in both directions, for whichever spouse dies first, and the will and beneficiary nominations drafted accordingly. This is standard work in our trusts and estate planning practice.

Charity

Death benefits paid to charity remain exempt from the new UK charge, and charitable bequests reduce the chargeable estate. Where a meaningful proportion of the net estate passes to charity, a reduced overall inheritance tax rate can apply. The US side offers its own estate tax charitable deduction, but the two systems do not recognise the same list of qualifying charities, so dual-qualified giving vehicles need to be selected deliberately rather than assumed.

What should be done before April 2027?

There is roughly one full tax year of genuine planning runway. The moves that matter most are not exotic.

Reconsider the drawdown sequence

The decade-old advice to preserve the pension and spend other assets is now often wrong for estates that will be chargeable. Drawing pension income earlier, paying income tax at a controlled marginal rate, and using the net proceeds to make lifetime gifts or fund exempt transfers can materially reduce the eventual 40% charge. For a US citizen this needs modelling in both systems simultaneously, because a UK-efficient drawdown pattern can be US-inefficient and vice versa.

Use the exemptions that are still there

Regular gifts out of surplus income remain one of the most powerful and least used UK exemptions, and pension income can fund them. Potentially exempt transfers still fall out of the estate after seven years. The annual exemption is small but cumulative. None of these are new — they are simply far more valuable now that the pension no longer does the job by itself. Note that the US gift tax system does not mirror the UK's, and a gift that is exempt in Britain can still be a reportable US taxable gift.

Solve the liquidity problem, not just the tax problem

Life cover written under an appropriate trust remains the cleanest way to fund an inheritance tax liability without forcing a sale. For US citizens the policy structure needs care: a policy that is efficient for UK purposes can be included in the US gross estate if the decedent held incidents of ownership, and the wrong wrapper can create punitive US tax treatment. Structure first, then buy.

Fix the beneficiary designations

Beneficiary nominations across a SIPP, a 401(k) and an IRA are frequently inconsistent, decades old, and drafted without reference to the will. Under the new regime they drive both the inheritance tax outcome and the income tax outcome for the recipient. Reviewing them is cheap, quick, and the highest return per hour of any step on this list.

Build the estate file now

Because personal representatives must gather pension values before probate, the most practical gift a client can leave is a complete, current schedule of every arrangement: scheme name, administrator, policy number, contact route, nomination in force, and approximate value. For US accounts, add the custodian's international servicing contact. Our US-UK tax accountants prepare these as a matter of course, and further technical material sits in our guides library.

The mistakes we see most often

• Assuming the change applies only to UK schemes, and leaving the 401(k) and IRA out of the estate model entirely.
• Assuming the estate tax treaty exempts the pension. It does not; it allocates and credits.
• Treating the US and UK filings as separate projects, which destroys the credit position and forfeits the income in respect of a decedent deduction.
• Relying on domicile arguments that the UK abolished for inheritance tax purposes in April 2025.
• Leaving a non-US-citizen spouse to inherit without a qualified domestic trust in place.
• Ignoring liquidity — the tax is due before probate, and the pension is the asset the family cannot touch.

Speak to us before the rule, not after it

An estate containing a SIPP, a 401(k) and an IRA held by a US citizen who has lived in Britain for a decade is now one of the most technically demanding structures in private client tax. It engages two death tax regimes, two income tax regimes, a treaty from 1978, a residence test from 2025 and a pension charge from 2027 — and it has to be administered by personal representatives working across a five-hour time difference under a probate deadline. The families who come through this well are the ones who documented, modelled and restructured before April 2027, not the ones who discovered the problem in the weeks after a death. If you hold UK and US pension wealth and want a clear, confidential view of your exposure and the options still open, contact our cross-border team to arrange a private consultation.