The pension you cannot take with you: exit tax and a UK pension

Figures relate to tax year 2026 (US) · 2026-27 (UK)

Most Americans in Britain who renounce have a British pension. Many have more in it than in anything else they own.

The exit tax UK pension rules treat that pension in a way most people do not expect. For a covered expatriate, America usually taxes the whole present value as income on the day before you renounce, with no exclusion amount to soften it.

This guide explains why that happens, who it applies to, and how to check your position before booking an appointment at the embassy. It uses the published 2026 and 2027 figures from the IRS.

Key takeaways

• Only covered expatriates face the exit tax UK pension charge.
• You are covered if your average tax exceeds $211,000 for 2026, your net worth is $2 million or more, or you cannot certify five years of compliance.
• A British pension is a deferred compensation item, not an ordinary asset.
• It is usually an ineligible item, because British providers are not American payors.
• Its present value is taxed as income on the day before expatriation.
• The $910,000 exclusion for 2026 does not reduce that income.
• Britain charges nothing on renunciation, so there is no British tax to credit.

Why is a British pension treated differently from your other assets?

Because the law takes deferred compensation out of the deemed sale and gives it its own rules. According to the instructions for Form 8854, a deferred compensation item includes any interest in a foreign pension plan or similar retirement arrangement. So your British pension is never part of the mark-to-market calculation.

Instead, the pension falls into one of two groups. Eligible items keep their tax deferral, with tax withheld when payments are later made. Ineligible items meet the tax at once, as if paid out in full.

Which group you fall into depends on who pays the pension, not on what kind of pension it is. That is where British pensions run into trouble.

What makes the exit tax UK pension charge apply to your scheme?

An item is eligible only if the payor is an American person or a foreign payor that elects to count as one. You must also notify the payor on Form W-8CE and waive any treaty reduction in withholding. British pension schemes almost never make that election, so a British pension is usually ineligible.

An eligible item avoids the exit charge but suffers 30% withholding on each later payment. Notably, you also give up the treaty for that item. So even where eligibility were available, it would not suit everyone.

For an ineligible item, the Form 8854 instructions say you count as receiving the present value of your accrued benefit on the day before your expatriation date. That amount goes on your final American return as income.

Why does the exclusion amount not help?

The exclusion reduces only the gain from the deemed sale of your property. For 2026 it is $910,000, and for 2027 it is $940,000, according to the IRS revenue procedures. A pension taxed as an ineligible deferred compensation item sits outside that calculation, so the full present value counts as income.

This catches people who have read about the exclusion and assumed it covers everything. For example, someone with $500,000 of share gains and a $400,000 pension might expect the exclusion to cover both. In fact, it covers the shares and leaves the pension fully taxable.

Our guide to the exit tax and Form 8854 covers the deemed sale itself.

Who is a covered expatriate?

Any one of three tests makes you covered. Your average annual net income tax for the five years before expatriation exceeds $211,000 for 2026, or $218,000 for 2027. Your net worth is $2 million or more on the date you expatriate. Or you fail to certify on Form 8854 that you met all federal tax obligations for the previous five years.

The third test catches people with modest wealth. In practice, many Americans in Britain have missed returns or bank reports, and that alone makes them covered. So the pension charge can apply to someone with no great fortune at all.

The net worth test is not indexed for inflation. Meanwhile, house prices and pension values keep rising, so more families cross it each year.

Does the pension count towards the $2 million test?

Yes. The Form 8854 balance sheet asks for the present value of your American and foreign pensions on the expatriation date. So a British pension counts towards net worth alongside your home, savings and investments. A large pension can push you over $2 million even when nothing else would.

Defined benefit pensions are the hardest case. A final salary scheme paying £30,000 a year can carry a present value well above £500,000. That figure needs an actuarial valuation, not a guess from a statement.

Married couples should remember that the test applies to each person separately. Assets in a non-American spouse's name do not count towards your net worth.

Are dual citizens from birth treated differently?

Some are. If you became a citizen of both countries at birth, still hold British citizenship and pay British tax as a resident, and were an American resident for no more than 10 of the last 15 tax years, the tax and net worth tests do not apply. However, you must still certify five years of compliance.

So an American-born dual national raised in Britain often escapes covered status entirely, provided their filing is up to date. That person's pension then leaves with them untaxed by America. Our guide to renouncing US citizenship covers the process.

What about green card holders who worked in Britain first?

Long-term green card holders face the same exit rules when they give up residence. However, the instructions note that a deferred compensation item excludes the part earned for services outside America while you were neither a citizen nor a resident. So pension built up in Britain before you moved to America may fall outside the charge.

That carve-out needs records. You must split the pension between periods before and after you became resident, which is easier for a defined contribution pot than for a final salary scheme.

A worked example

Take an illustrative example of an American in Bristol who renounces in 2026. They own a home and savings worth $1,800,000 and a SIPP worth £300,000. We use $1.30 to £1 purely for the arithmetic.

1. SIPP value in dollars: £300,000 at $1.30 is $390,000.
2. Net worth including the pension: $1,800,000 plus $390,000 is $2,190,000, so the $2 million test is met.
3. Covered expatriate status follows, so the exit tax UK pension rules apply.
4. The SIPP is an ineligible item, so $390,000 is income on the day before expatriation.
5. On a dual-status return there is no standard deduction, so roughly $105,000 of federal tax arises on that income alone.
6. Britain charges nothing on the same day, so no foreign tax credit reduces it.

Now change one fact. If $250,000 of the savings had moved to a non-American spouse beforehand, net worth would fall to $1,940,000. With compliant filing and tax below the threshold, the person would escape covered status, and the pension charge would never arise.

How do you value a defined contribution pension?

For a pot such as a SIPP or a workplace defined contribution scheme, the present value is normally the fund value on the day before you expatriate. Ask the provider for a valuation at that date, not the last annual statement. Then convert it to dollars at the rate for that day.

Watch for exit fees and guaranteed rates hidden inside older policies. A plan with a guaranteed annuity rate can be worth more than its fund value. Similarly, a pot with a large exit charge may be worth less, and the valuation should reflect both.

What about a final salary scheme?

A defined benefit scheme pays an income for life, so it has no simple fund value. Its present value depends on your age, the pension promised, how it rises each year and the discount rate used. That calls for an actuarial calculation on reasonable assumptions, documented in your file.

Public sector schemes such as the NHS or teachers' pensions are common examples. Notably, a scheme paying £25,000 a year from 60 can have a present value many times that annual figure. So a teacher or nurse with modest savings can still face a large exit tax UK pension charge if covered.

Our guide to teachers' pensions and US tax covers how these schemes appear on an American return while you remain a taxpayer.

Can you draw the pension before renouncing?

Sometimes, once you reach the minimum pension age, but it rarely helps. Drawing it before you renounce turns the pension into taxable income in both countries in that year. Britain then taxes most of it at your marginal rate, after the tax-free lump sum.

The British tax would at least create a foreign tax credit against the American tax on the same payment. However, taking a large sum in one year can push you into the higher British bands. So compare both routes on real figures before deciding.

What forms report the pension on exit?

Form 8854 lists the pension in Part II, with a statement naming each ineligible item and its present value on the day before expatriation. The same amount goes on your final Form 1040 as income. In addition, you list the pension on your last FBAR and, where values require it, on Form 8938.

File the final return and Form 8854 by the normal deadline for that year. A missing Form 8854 makes you covered by default, which can bring the pension charge in even if your wealth was below the limits.

Does the treaty protect a British pension on exit?

The treaty between the two countries protects pension growth while you remain an American taxpayer. Whether it overrides the exit charge on a British pension is far less clear. Some advisers take a treaty position, and you must disclose any such position on Form 8833.

A treaty position on exit is a judgement call with real risk. So base it on a written analysis of your scheme, not on a general belief that the treaty shields pensions. Our guide to Form 8833 treaty disclosure explains the filing.

What happens to later pension payments?

After you renounce, you are no longer an American taxpayer on foreign income. So Britain alone taxes later pension payments to you, as for any British resident. America has already taxed the value once on exit.

The mismatch is the timing. America taxes the whole value now, while Britain taxes each payment as you draw it over many years. Because the two charges fall in different years, the American tax cannot be offset by later British tax.

The British 25% tax-free lump sum, capped at £268,275 under the lump sum allowance, also makes no difference on exit. America taxes the full present value, including the part Britain will later pay tax free.

Does it matter when in the year you renounce?

It can. The pension income lands in your final American tax year, which runs from 1 January to your expatriation date. If that year already holds a large salary, the pension sits on top of it in the highest brackets. Renouncing early in a year can keep other income out of the same return.

The exchange rate also matters, because the IRS values the pension in dollars on the day before you expatriate. A weaker pound reduces the dollar figure. However, nobody can time currency markets reliably, so treat this as a side effect rather than a plan.

Should you sort out late filings first?

Yes, almost always. The certification test looks back five years, so unfiled returns or bank reports make you covered whatever your wealth. Bringing those years up to date before you renounce is often the single step that keeps a pension out of the exit charge.

Most Americans in Britain qualify for the streamlined foreign procedures, which carry no penalty for non-willful failures. Because the procedures cover three years of returns and six years of bank reports, plan the timing so the full five-year look-back is clean.

Common mistakes and penalties around pensions and renunciation

The most common mistake is renouncing before checking covered status. Once you have sworn the oath, the valuation date cannot move and the planning window has closed. Similarly, people often forget that failing to file Form 8854 makes them covered regardless of wealth.

• Assuming the exclusion amount covers the pension.
• Leaving the pension out of the $2 million net worth test.
• Valuing a final salary pension from the annual statement instead of an actuarial basis.
• Renouncing with unfiled returns, which makes you covered.
• Taking a treaty position without Form 8833.
• Ignoring the exit tax UK pension charge because Britain taxes nothing on the day.

Steps to check your position before you renounce

1. Bring your American filing up to date for the last five years, through the streamlined procedures if needed.
2. Value every asset, including the present value of each British pension, in dollars.
3. Work out your average net income tax for the five prior years.
4. Check whether the dual citizen at birth exception applies to you.
5. If you are near $2 million, review lawful planning such as gifts to a non-American spouse.
6. Model the exit tax UK pension income on a dual-status return before choosing a date.

How US UK Tax Accountants helps

We review covered status before you book an appointment, while there is still time to plan. That includes valuing British pensions properly and bringing late filings into line. Our expatriation service covers the final return, Form 8854 and the certification.

In our practice, the pension is the asset that most often turns an ordinary renunciation into a covered one. A short review months in advance usually shows whether that risk is real.

If you are thinking about renouncing and hold a British pension, contact us and we will check your position first.

This article is general information, not personal tax advice. Expatriation is permanent, so take advice on your own facts before acting.

Last reviewed: 11 November 2026.