From 6 April 2027, most unused pension funds and pension death benefits are treated as part of the deceased member's estate for UK Inheritance Tax, taxed at 40% above the available nil-rate bands. For a US citizen, dual citizen or Green Card holder living in the UK, that change matters twice over. Your worldwide estate is already within the US federal estate tax net by virtue of citizenship or lawful permanent residence, and a UK SIPP or personal pension is a worldwide asset. The result is that one pot can now be exposed to UK IHT and US estate tax at the same time, with the 1978 US/UK estate tax treaty offering relief that is real but incomplete for pension assets.
What actually changes on 6 April 2027
Under the rules in force up to 5 April 2027, unused pension funds sitting in a discretionary trust-based scheme generally sat outside the member's estate for Inheritance Tax. Scheme administrators exercised discretion over who received death benefits, and that discretion is what kept the fund out of the estate. That has made UK registered pensions, and SIPPs in particular, one of the most efficient succession vehicles available in the UK for the last decade.
HMRC's technical note on Inheritance Tax on pensions sets out the new position. From 6 April 2027 the deceased member is treated as beneficially entitled to notional pension property immediately before death, so most unused funds and death benefits are brought into the estate and valued alongside the house, the investment portfolio and everything else.
The mechanics matter for anyone modelling their own position. The standard Inheritance Tax rate is 40% on the value of the estate above the available threshold, with a reduced 36% rate where at least 10% of the net estate passes to charity, per GOV.UK guidance on Inheritance Tax. The nil-rate band remains £325,000 and the residence nil-rate band £175,000, with a £2 million taper threshold, and those figures are now fixed through to the 2029 to 2030 tax year. If you want to sketch the UK-side number before speaking to an adviser, our UK inheritance tax calculator will get you to an order of magnitude.
- Most unused pension funds and pension death benefits fall within the estate from 6 April 2027
- Standard IHT rate 40%; reduced rate 36% where 10% or more of the net estate goes to charity
- Nil-rate band £325,000 and residence nil-rate band £175,000, frozen to 2029-30
- Taper threshold for the residence nil-rate band remains £2 million
What stays outside the estate
The reform is broad but not universal, and the exclusions are where a lot of planning value sits. Death in service benefits paid from a registered pension scheme, meaning amounts payable because the member was employed by a particular employer immediately before death, are excluded from the estate from 6 April 2027. That is a significant carve-out for senior employees of UK subsidiaries of US groups, where a four-times-salary death in service benefit can be a very large number.
HMRC's technical note also keeps dependants' scheme pensions outside the charge, along with trivial commutation of such pensions and joint life annuities purchased with a lifetime annuity. And the existing exemptions continue to do their work: transfers to a spouse or civil partner and gifts to qualifying charities remain exempt, applied after the notional pension property has been valued.
There is also a clean commencement rule that is worth knowing if you are dealing with a death now. If the member dies before 6 April 2027, the current rules apply even where the benefits are actually paid after that date. The trigger is the date of death, not the date of payment.
- Death in service benefits from a registered scheme: excluded
- Dependants' scheme pensions and joint life annuities: excluded
- Benefits passing to a spouse, civil partner or qualifying charity: exempt under existing rules
- Death before 6 April 2027: old rules apply, even if benefits are paid later
Why this lands harder on US persons than on anyone else
For a UK-only taxpayer, the 2027 reform is a straightforward planning problem: the pension has moved from outside the estate to inside it, and the response is to re-sequence drawdown, review the death benefit nomination and reconsider lifetime gifting. Unwelcome, but one-dimensional.
For a US citizen, dual citizen or Green Card holder resident in the UK, the same event adds a second tax system that was already watching the pension. The United States taxes its citizens and lawful permanent residents on their worldwide estates regardless of where they live. Nothing about being tax resident in London, holding a UK-issued SIPP, or having lived outside the US for twenty years changes that. So the pension pot was always a US estate tax asset; what changed on 6 April 2027 is that it also became a UK Inheritance Tax asset.
That is the core of the problem. Two jurisdictions, two different tax bases, two different sets of thresholds, and a treaty written in 1978 that never contemplated a UK regime in which registered pensions form part of the taxable estate. We cover the underlying structural differences in more depth in our comparison of US estate tax versus UK inheritance tax.
The US side: your worldwide estate is already in scope
The good news, and it is genuinely good, is that the US federal exclusion is currently very large. Estates of decedents dying during 2026 have a basic exclusion amount of $15,000,000, up from $13,990,000 for 2025, following the amendment to section 2010(c)(3) made by the One, Big, Beautiful Bill. The figure is confirmed in the IRS tax inflation adjustments for tax year 2026.
For most Americans in the UK, an exclusion at that level means no US federal estate tax is actually payable. That is why so many US expatriate clients have historically treated the US estate tax as a filing exercise rather than a cash exercise. But the exclusion being large does not make the US regime irrelevant to the 2027 problem, for two reasons.
First, the exclusion is a US-side shelter, not a UK-side one. A $15 million US exclusion does nothing to reduce a UK Inheritance Tax bill computed against a £325,000 nil-rate band. Second, if you are a genuinely high-net-worth family with a large pension, substantial UK property, US real estate and an investment portfolio, you can exceed even a $15 million exclusion, at which point you are paying real tax in both systems and the credit mechanics in the treaty become the whole ball game. You can model the US-side exposure with our US estate tax calculator.
Where the double exposure actually bites: a SIPP as the worked example
Consider the archetype we see most often. A US citizen, resident in the UK for fifteen years, aged 68, with a £1.4 million SIPP built partly from transferred UK occupational benefits, a £1.1 million London property held jointly, a $2.4 million US brokerage account and a modest US IRA. Under pre-2027 rules the SIPP passed to the two adult children free of UK IHT via scheme discretion. From 6 April 2027 it does not.
The UK estate now includes the SIPP. Against a nil-rate band of £325,000 and, depending on how the property passes, a residence nil-rate band of £175,000, the exposure on the pension element alone is material at 40%. Meanwhile the same SIPP sits inside a US gross estate that must be reported because the decedent is a US citizen, and it will be characterised for US purposes without much regard for how the UK treats it. The interaction between US tax rules and UK pension wrappers is a persistent source of trouble in its own right, which we set out in our guide to US tax treatment of UK pensions and SIPPs.
In this scenario the family is unlikely to write a cheque to the IRS, because the $15 million exclusion absorbs the US charge. But they will write a substantial cheque to HMRC, and the relief that would ordinarily net the two systems against each other is doing nothing useful, because the US tax that would generate a credit was never paid.
The US/UK estate tax treaty, and why it may not rescue a pension
The UK and the United States have a dedicated estate and gift tax treaty, concluded in London on 19 October 1978 and implemented by the Double Taxation Relief (Taxes on Estates of Deceased Persons and on Gifts) (United States of America) Order 1979. It is listed among the USA tax treaties published on GOV.UK. The convention covers the US federal estate and gift taxes, including the tax on generation-skipping transfers, and the corresponding UK tax on death.
The treaty does two useful things. It allocates primary taxing rights by reference to where the transferor was domiciled or of which state they were a national, and it provides credit relief so that the same asset is not taxed twice in full. It also contains a tie-breaker for individuals who could be treated as domiciled in both states, which matters enormously for a long-settled American in London.
The limitation is one of design. The treaty was negotiated when UK pensions did not form part of the taxable estate, so it contains no bespoke pensions article for this situation. Relief therefore depends on the general credit and situs machinery, and on both revenue authorities agreeing how a SIPP should be characterised and where it is situated. Where the UK charges tax and the US does not, because the exclusion covers the estate, there is no US tax against which to credit the UK charge. The treaty prevents genuine double taxation; it does not prevent a one-sided UK charge on an asset that used to escape it entirely.
HMRC's procedure adds practical friction too. Where the treaty would exclude UK property from Inheritance Tax, HMRC will generally want certification from the US authorities that the assets have been disclosed and any US tax paid or enforceable before it releases its charge. That is a paperwork exercise personal representatives should plan for rather than discover.
The income tax layer: death at or after 75
There is a third tax that is frequently forgotten in this analysis, and it is the one that turns an uncomfortable outcome into a punitive one. Where the member dies at or after age 75, death benefits paid from the pension are taxable as income in the hands of the beneficiary at their marginal rate. For the 2026-27 UK tax year the personal allowance is £12,570, the basic rate of 20% applies to £50,270, the higher rate of 40% applies to £125,140, and the additional rate of 45% applies above that, per GOV.UK income tax rates.
Stack that on top of a 40% Inheritance Tax charge on the same fund and the effective rate on the amount reaching a higher or additional rate beneficiary becomes very high indeed. HMRC's technical note does provide a mitigation: where Inheritance Tax has been paid via a payment notice or suffered by the beneficiary, the taxable income is reduced by the amount corresponding to the Inheritance Tax and interest paid. That relief is real, but it requires the mechanics to be followed properly, and it does not remove the layering.
For a US person there is then a fourth question: how does the US treat the death benefit distribution received by a beneficiary who is themselves a US citizen? A dual-citizen adult child receiving a lump sum from a UK SIPP has a US reporting position and potentially a US income tax position on the same money. This is where families discover that the tax-efficient legacy they planned in 2019 has become something quite different.
Personal representatives, the 50% withholding direction and the 15-month clock
The administrative design of the reform deserves close attention, because it puts a real burden on whoever ends up as executor. Personal representatives are liable for reporting and paying the Inheritance Tax on unused pension funds. That is a change in kind, not just degree: the PRs are now accountable for tax on an asset they may not control, held by a scheme administrator they have no relationship with.
To make that workable, personal representatives can direct scheme administrators to withhold 50% of the taxable benefits and pay the Inheritance Tax to HMRC before releasing the balance. The withholding protection runs for up to 15 months from the date of death, giving the PRs time to settle the liability without being forced to liquidate other estate assets or fund the tax personally.
Once beneficiaries become entitled to the benefits, they share joint and several liability with the personal representative for tax owed. In a cross-border family that is a live risk: a beneficiary in Chicago who receives a payment from a UK scheme may be carrying UK tax liability without realising it, and may have spent the money by the time HMRC follows up.
If you are naming personal representatives in a will, this reform is a reason to revisit that choice. An elderly UK-resident sibling is a very different proposition as an executor when the role now involves coordinating with pension scheme administrators, meeting a 15-month deadline and handling a US estate tax filing in parallel.
- PRs are liable for reporting and paying IHT on unused pension funds
- PRs may direct schemes to withhold 50% of taxable benefits, for up to 15 months from date of death
- Beneficiaries take joint and several liability once entitled
- Cross-border estates need a PR who can handle HMRC and IRS obligations in parallel
The spouse exemption trap for mixed-nationality couples
The UK spouse exemption survives the reform, so pension benefits passing to a surviving spouse or civil partner remain exempt from Inheritance Tax. The obvious answer, therefore, is to nominate the spouse. For many couples that works well and simply defers the charge to the second death, when the transferable nil-rate bands are available.
For mixed-nationality couples the picture is more complicated on the US side. The unlimited US marital deduction is available for transfers to a US citizen spouse. Where the surviving spouse is not a US citizen, the unlimited marital deduction is not available in the same way, and planning typically involves a qualified domestic trust or careful use of the exclusion. An American married to a British national needs to know which side of that line they fall on before nominating anyone.
There is a mirror-image issue in the other direction. Nominating a US-citizen spouse to receive a UK pension death benefit may solve the UK Inheritance Tax problem elegantly while creating a US income tax and reporting event, and while concentrating assets in a survivor whose own estate is then larger on both sides. The right answer is almost never the same for two couples with superficially similar balance sheets.
Long-term UK residence: the test that decides whether your worldwide estate is exposed
None of the above matters much if only your UK assets are within the UK Inheritance Tax net. Whether your worldwide estate is exposed now turns on the long-term UK residence test that replaced domicile from 6 April 2025.
Per GOV.UK guidance on Inheritance Tax if you are a long-term UK resident, an individual is a long-term UK resident if they have been resident in the UK for at least 10 out of the 20 tax years immediately preceding the tax year in which the chargeable event, including death, arises. Once you meet it, foreign assets owned outright come within the charge.
The trailing tail is what catches people. You can retain long-term UK resident status for up to 10 tax years after leaving the UK, though the tail is shorter if you have not been UK resident for all of the previous 20 years. Someone who lived in the UK for 15 years stops being a long-term UK resident 5 years after leaving. And if you return to the UK after 10 consecutive years of non-residence, the test resets, with only the year of return and subsequent years counting.
For Americans who arrived under the old remittance basis and have been recalibrating ever since, this test sits at the centre of everything. We unpack the wider reform, including the four-year foreign income and gains regime, in our analysis of the abolition of the non-dom regime and the FIG rules.
Green Card holders: the assumption that undoes the plan
Lawful permanent residents living in the UK occupy the most misunderstood position of all. The instinctive response when a UK tax bill appears is to reduce UK exposure, and the instinctive response when a US bill appears is to hand back the Green Card. Both instincts are dangerous when applied without advice.
Holding a Green Card keeps you within the US worldwide tax net for income and estate purposes, so the pension remains a US estate asset while you hold it. Abandoning it is not a costless exit: long-term permanent residents can fall within the expatriation rules, with their own exit tax and inheritance consequences for US beneficiaries, and abandoning status for tax reasons while intending to keep living in the UK is a decision with immigration as well as tax consequences. We set out the practical position in our guide for Green Card holders living in the UK.
The pension reform sharpens that trade-off rather than resolving it. A Green Card holder with a large SIPP now has UK Inheritance Tax exposure that did not exist before, US estate tax exposure that always did, and a decision about immigration status that affects both. That is a decision to make with a joint UK and US adviser in the room, not sequentially with two specialists who never speak to one another.
What to do before 6 April 2027
There is still a planning window, and it is narrower than it looks, because several of the sensible responses take twelve months or more to implement properly. The priority is to establish the size of the problem accurately before reaching for solutions.
Start with the numbers. Value the pension realistically at projected date of death rather than today, model the UK estate against frozen nil-rate bands through to 2029-30, and run the US gross estate against the current exclusion. Only then does it become clear whether you have a UK-only problem, a genuine two-sided problem, or no problem at all.
Then look at the levers. Drawdown sequencing changes materially under the new rules: the old logic of spending non-pension assets first and preserving the pension as an IHT-free legacy is largely inverted for many estates. Death benefit nominations should be reviewed against both tax systems rather than the UK one alone. Lifetime gifting, charitable legacies at the 10% threshold to access the 36% rate, and the treatment of death in service cover all warrant fresh analysis.
Finally, deal with the administration. Confirm who your personal representatives are and whether they can realistically discharge the new obligations. Make sure your scheme administrators hold current, correct nominations. And put the documentation somewhere your executors can find it, because a 15-month withholding window is not long when it starts with a search for paperwork.
- Model the UK estate and the US gross estate separately, then together
- Revisit drawdown sequencing: preserving the pension is no longer automatically efficient
- Review death benefit nominations against both UK IHT and US estate tax consequences
- Check whether death in service cover can carry more of the load, given the exclusion
- Confirm your personal representatives can handle HMRC and IRS deadlines simultaneously
- Consider the 10% charitable legacy threshold to access the 36% reduced IHT rate
Mistakes we are already seeing
The most common error is treating 6 April 2027 as a deadline to act by rather than a date the rules change on. Several of the responses that look attractive, particularly large lifetime gifts, only work if you survive long enough for them to fall out of the estate. Acting in March 2027 is not the same as having acted in 2025.
The second is assuming the treaty solves it. Clients hear that a US/UK estate tax treaty exists and reasonably conclude that double taxation cannot arise. What the treaty actually delivers is credit relief and an allocation of taxing rights, and neither helps when the UK charges tax on an asset that the US exclusion has already sheltered from US tax.
The third is planning one side at a time. A UK independent financial adviser optimising for Inheritance Tax and a US CPA optimising for the exclusion can each produce a defensible plan, and the combination can still be worse than either alone. Pension and estate planning for a US person in the UK is a single problem, and it needs to be solved as one.
Key dates and figures at a glance
The list below summarises the anchors you need. Every figure here is drawn from HMRC or IRS published guidance for the stated tax year; nothing in cross-border planning should be built on an unverified number.
If your circumstances change, or if a future UK Budget alters any of the frozen thresholds, these figures should be re-checked before they are relied on. We review this article at least twice a year and update it when the underlying guidance moves.
- 6 April 2027: most unused pension funds and death benefits enter the estate for UK IHT
- Death before 6 April 2027: existing rules apply, even where benefits are paid later
- UK IHT rate: 40% standard, 36% where 10% or more of the net estate passes to charity
- Nil-rate band £325,000 and residence nil-rate band £175,000, frozen to 2029-30; £2 million taper threshold
- UK long-term resident test: UK resident for 10 of the previous 20 tax years
- UK 2026-27 income tax: personal allowance £12,570; 20% to £50,270; 40% to £125,140; 45% above
- US basic exclusion amount for 2026 decedents: $15,000,000, up from $13,990,000 for 2025
- PR withholding direction: up to 50% of taxable benefits, for up to 15 months from date of death
A note on scope and advice
This article describes the published UK and US rules as at July 2026 and is written for high-net-worth US citizens, dual citizens and Green Card holders who are resident in the United Kingdom. It is general information, not personal tax advice, and it does not constitute investment advice or a recommendation about any particular pension arrangement.
Cross-border estate planning is unusually sensitive to facts that look incidental: the exact wording of your scheme rules, the date you first became UK resident, whether your spouse is a US citizen, where your children are resident, and how your assets are titled. Two clients with identical balance sheets routinely need different answers.
Before acting on anything set out here, confirm your own position with an adviser qualified in both jurisdictions. TaxStone's team holds Enrolled Agent status in the United States and ACCA qualification in the United Kingdom, which is the combination this reform demands.
