Chancellor Rachel Reeves is planning to increase the Government funds generated through the tax from someone’s estate when they die, according to the BBC.
As it stands, pensions are not subject to the 40% rate that is slapped on the homes, possessions and assets of someone up to a £325,000 limit – also known as the nil-rate band.
Since 2015, if someone dies under the age of 75, a defined contribution pension can be passed down to their child.
After the age of 75, income tax is paid at the recipient’s marginal rate, which could potentially be 40% or 45%. The receipts for inheritance tax rose by £30m in 2023 to reach a £697m total, according to HMRC data. This signifies 0.7% of all the Government’s revenue from taxes.
Last year, 27,800 deaths were subjected to inheritance tax, which represented 4.39% of all deaths in the UK.
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It is the latest rumour to come out of Downing Street, following a reported raid on the tax-free lump sum you can take out of your pension and a hike in capital gains tax (CGT).
The options to the Labour Government to plug the £22bn black hole it says it inherited from the previous Government are slimmed down due to the party’s manifesto pledge not to hike income tax or National Insurance.
Those contributions, alongside VAT, generate over £627bn of the £1.1trn paid through taxes into the pot for public spending.
With the prospect of an inheritance tax on the cards, a tenth of UK retirees surveyed by Hargreaves Lansdown said this was their biggest tax fear in the upcoming Budget on 30 October.
‘Devastating for millions of families’
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It’s hardly surprising. The fact that so few estates pay inheritance tax owes an enormous amount to these exemptions, so if the Government tweaked some of the big hitters, it would be devastating for millions of families.”
Another expert, Jordan Gillies, partner at financial planning firm Saltus, said the “tweaks” to IHT could cause a stealth tax on pensioners.
Gillies said: “The removal of inheritance tax benefits from pensions could create a double tax hit for beneficiaries.
“Many high-net-worth individuals tap into their pension funds last to make the most of IHT advantages that currently accrue to pensions, but this change could upset that approach. The recent trend of increasing pension contributions following the scrapping of the lifetime allowance might reverse, pushing many towards options like nil-rate band trusts instead.”
He added: “Although if the nil-rate band is removed – which would feel like a stealth tax – families could be pushed to explore other options like insurance products for IHT planning. It would also likely drive up gifting levels, which could reduce Treasury revenue.
“Currently, you do not have to pay IHT on gifts given as long as they were given seven years before you die, and you can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. Gifting is another area the Chancellor may consider changing – potentially removing or extending the seven-year rule or introducing a 10% charge on larger lifetime gifts.”
