Labour’s pensions inheritance tax raid will hit 150,000 grieving families with higher death duty bills, figures show.
Rachel Reeves’s decision to apply inheritance tax to pension wealth from April 2027 will drag 31,200 families into paying the levy for the first time by 2030, according to data obtained through a Freedom of Information request.
Some 121,500 families that already pay inheritance tax will also see their bill rise as a result of the change.
The policy means that estates with relatively modest assets and pension savings are likely to face either new or higher inheritance tax liabilities.
Inheritance tax is usually paid at a rate of 40pc on an estate above the “nil-rate band”, which is currently set at £325,000.
Someone with a mortgage-free property worth £300,000 – just above the national average – and a pension worth £100,000 would face an inheritance tax liability of £30,000 from 2027, according to analysis by investment platform Interactive Investor.
This would rise by £80,000 to £110,000 if they had a pension valued at £300,000.
The figures assume the full nil-rate band is available, and that the additional residence nil-rate band of £175,000 – if you pass a family home to direct descendants – does not apply.
The nil-rate band or residence nil-rate band allowances are set to remain frozen at their current levels until 2030.
Currently, pensions inherited by beneficiaries of those who died aged 75 or older are subject to income tax at the beneficiary’s marginal rate.
From April 2027, this will apply after inheritance tax has been deducted, as beneficiaries withdraw income or lump sums from the inherited pension.
As a result of this “double -hit”, some taxpayers could face marginal tax rates as high as 90pc on inherited pensions, according to accountancy firm RSM.
The Office for Budget Responsibility (OBR) estimates that in the 2027-28 tax year alone, the average inheritance tax liability is expected to be £169,000, increasing by around £34,000 when pension assets are included in the value of the estate.
However, the OBR estimates do not account for potential behavioural changes following the announcement of these measures, such as individuals drawing down pension funds more quickly or making greater use of exemptions or reliefs to reduce their estate’s overall inheritance tax liability.
Inheritance tax receipts have already soared to record highs, hitting £6.3bn between April and December 2024, £600m higher than the same period in 2023.
Pensions were previously considered a tax-efficient way to pass on wealth. But experts have warned that the risk of a large tax bill on death will reduce the incentives for people to save for retirement.
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