What is the first practical step I should take?

Check whether your undrawn DC pension pot, added to your other UK assets, exceeds your available nil-rate bands (£325,000 standard; up to £500,000 per person with the residential band). If it does, speak to a cross-border estate planner before end-2026 to restructure before the April 2027 deadline.

UK Pension IHT from 2027: What British Costa Blanca Property Owners Need to Know and Do Now

What's Changing — and Why It Matters for Your Spanish Property

For decades, one of the most powerful tools in a British estate plan has been the defined-contribution pension pot. Draw on other assets first, let the pension compound, and the undrawn balance passes to your children or grandchildren entirely outside the inheritance tax (IHT) net. From 6 April 2027, that advantage ends.

The Finance Act 2026 — Royal Assent 18 March 2026, enacting the October 2024 Autumn Budget measure — brings most unused UK pension funds and death benefits into the estate for IHT purposes. There is still time to plan sensibly, and your Spanish property sits in one of Europe's most owner-friendly inheritance regimes.

The Rule Change in Plain English

Under rules still in force until 5 April 2027, undrawn funds in defined-contribution (DC) pensions — personal pensions, SIPPs, workplace DC schemes — fall outside your taxable estate. Leave the pot untouched and the whole balance skips the 40 % IHT charge.

From 6 April 2027, that changes. Most unused DC pension funds and death benefits are included in the estate at 40 % above the nil-rate band — currently £325,000, rising to an effective £500,000 per person (or £1 million per couple) where a main residence passes to direct descendants under the residential nil-rate band.

What the Finance Act 2026 keeps exempt:

Transfers between spouses and civil partners remain fully IHT-free.
Charitable legacies stay outside IHT.
Death-in-service lump sums from registered occupational schemes are excluded.
Dependants' scheme pensions and joint life annuities are excluded.
Defined-benefit (final salary) pension income is largely unaffected.

Where the deceased dies after age 75, beneficiaries inheriting DC funds can also face income tax on withdrawals at their marginal rate — on top of any IHT already paid on the estate. Getting the planning right before April 2027 substantially reduces that double-taxation risk.

How This Sits Alongside UK Residence-Based IHT

Since 6 April 2025, UK IHT no longer turns on domicile — it turns on long-term residence. If you spent 10 or more of the last 20 UK tax years in the UK, your entire worldwide estate — including your Costa Blanca villa — can be within the UK IHT net. There is also an IHT tail after departure: three years for those with 10–13 years of prior UK residence, up to ten years for those who spent 20 or more years there.

There is currently no UK-Spain double-tax agreement covering inheritance, so both systems can apply to the same assets simultaneously. A foreign tax credit may partially offset duplication, but modelling your exact position requires specialist cross-border advice.

The Good News: Valencian Community Rules Are Generous

Here is where the picture brightens considerably. Spanish succession tax (Impuesto sobre Sucesiones y Donaciones) is administered by the autonomous communities, and the Valencian Community — covering all of Alicante province, from Dénia south to Torrevieja — applies a 99 % bonificación on the succession tax liability for Group I heirs (children under 21) and Group II heirs (spouses, adult children, and parents), as confirmed under Ley 5/2025. This applies to non-residents, including UK nationals, on Spanish-situated assets.

In practice: a surviving spouse or adult child inheriting a Jávea or Moraira villa pays close to nothing in Spanish succession tax. For Costa Blanca owners, the inheritance picture divides into two systems — a generous Spanish regime for the Spanish property, and a UK IHT regime for worldwide assets (pension pots included) that becomes less generous from April 2027.

Five Steps to Take Before April 2027

1. Quantify your DC pension exposure. Add your undrawn pension pot to your other UK assets and check whether the total exceeds your available nil-rate bands (£325,000 standard; up to £500,000 per person if a residence passes to direct descendants). If it does, the 2027 change is directly relevant.

2. Review your drawdown strategy. Drawing on pension income earlier — rather than last — reduces the pot exposed to IHT. Surplus income redirected into ISAs stays outside the IHT net during the account holder's lifetime.

3. Consider structured lifetime gifts. Gifts that survive the donor by more than seven years fall entirely outside UK IHT. Starting a gifting programme now moves wealth to the next generation efficiently ahead of April 2027.

4. Update your expression of wishes. DC pension death benefits are nominated separately from your will. Review nominations with your pension provider to ensure they reflect your intentions under the new framework.

5. Commission a cross-border estate review. A specialist in both Spanish succession rules and UK IHT can model your combined exposure, verify that your UK and Spanish wills work together under EU Regulation 650/2012, and identify the most tax-efficient structure for your family.

The April 2027 deadline is close enough to act on, and far enough away for thoughtful planning rather than rushed decisions.

Frequently asked questions

Do I still owe UK inheritance tax if I now live permanently in Spain?

Possibly. Since 6 April 2025, UK IHT is based on long-term residence, not domicile. If you spent 10 or more of the last 20 UK tax years in the UK, your worldwide estate may remain within scope for three to ten years after you leave, depending on how long you lived there.

Does my Spanish property get taxed twice — by Spain and the UK?

In principle it can fall under both systems. There is no UK-Spain double-tax treaty for inheritance, but a foreign tax credit can often reduce duplication. The exact outcome depends on your residence history and asset profile — cross-border advice is essential.

Is my defined-benefit (final salary) pension affected by the April 2027 change?

No. Finance Act 2026 targets unused funds in defined-contribution pensions. Dependants' pensions from DB schemes and most in-service lump sums are excluded. Check the specifics with your scheme trustees.

How does the Valencian Community bonificación work for British owners of Costa Blanca property?

Under Ley 5/2025, Group I and Group II heirs (spouses, adult children, parents, children under 21) receive a 99 % reduction on Spanish succession tax for assets in the Valencian Community. This applies to non-residents including UK nationals, meaning most close-family inheritances of Costa Blanca property attract very little or no Spanish succession tax.

What should I do first?

Check whether your undrawn DC pension pot, added to your other UK assets, exceeds your available nil-rate bands. If it does, speak to a cross-border estate planner before end-2026 — that gives you the full window to restructure before April 2027.