Changes to pension schemes and inheritance tax (IHT) are set to affect British expats living in Spain.
Hundreds of thousands of Britons have made the sunny destination their home, but new UK rules coming into play from April 6, 2027, mean they could be subject to the 40 per cent IHT.
The regulations were announced in the 2024 Autumn Budget and mean that unused pension funds will be included in the total value of a person's estate and fall within the scope of IHT.
Britons living in Spain won't be exempt from the new rules and it could mean their remaining pension pot is taxed heavily before being passed down to family members.
The IHT 40 per cent rate applies to everything over a threshold of £325,000.
The British Government determines whether someone is a 'long-term resident' of the UK if they have been a UK tax resident for a minimum of ten of the last 20 tax years.
British expats living in Spain could be hit with a 40 per cent inheritance tax on their pensions when they die
If someone has lived outside of the UK long enough, UK IHT rules usually no longer apply.
But assets that remain in the UK, such as a pension, can still fall under the rules.
Chris Ball, CEO of expat financial planning company Hoxton Wealth, told The Olive Press: 'If you are currently living in Spain, you might think that moving to the country automatically removes your inheritance tax liabilities. However, this isn't the case.'
He continued: 'If you are trying to understand your and your family's position, start doing so now – and don't rush into any big decisions.'
The expert explained how 'even if you never set foot in Britain again' a UK-held pension could still be affected by the tax.
It may mean that once the individual has died, their family members and other beneficiaries will inherit less.
It would mean their beneficiaries could inherit less money
And if the individual is older than 75 when they pass away, beneficiaries could be hit with 'double taxation' where the pension falls under both the IHT and Income Tax.
According to Majorca Daily Bulletin, some expats are taking a 'spend the pension first' approach.
This involves spending their pension pot when they're still alive to reduce the taxable amount.
However, it is recommended to consider the income tax rates in the country of residence the individual is residing in at the time.