IHT on overseas pensions after (or even before?) April 2027.

EdSwippet

On my read of them, the govt's attempts to sort out the expected mechanics of applying IHT to unspent pensions appear to show up well a potentially large problem with overseas pensions.

The core of the problem is that overseas pensions will not (likely, cannot) work with the govt's suggested way through this. None will release assets to an estate administrator, nor will any be able to make a special case "authorised payments ... not subject to income tax" that UK PSA would allow for pension beneficiaries.

Worst case then, this leads to pure double tax. The PR pays 40% IHT out of other estate assets, but the beneficiary still likely faces full tax (either UK or foreign, depending on the specifics of any tax treaty) on distributions from the pension.

On average, this could perhaps come out to an effective total 60%-80% tax. At the extreme, in the UK 60% (no personal allowance) tax band, 40% IHT followed by 60% income tax comes to a nice round 100%. That is not taxation, it is confiscation.

The consultation response minimises this "atypical scenario" by generally hand-waving it away ("pension schemes with an overseas component typically take longer to share and validate information"). This is a misdirection. The timing is not the major problem here; it is the pure double-tax that can occur when tax rules mesh badly or not at all.

And actually, this may not be anything new. If an overseas pension is somehow not currently excluded from an estate in the same way as a UK one is, this is already a problem.

Aside from "death bed" full overseas pension withdrawals (not always feasible!), it is hard to think of any other way around this. We can hope, I suppose, that the final rules, when they come out, will handle this properly. However, "hope" is not a strategy.