UK households face HMRC 'pension death tax' which will 'sweep rug from under them'

UK households face HMRC 'pension death tax' which will 'sweep rug from under them'
-Credit: (Image: Reach Publishing Services Limited)


A pension "death tax" looms with Rachel Reeves looking to boost government coffers now the Labour Party government is in power. Chancellor Rachel Reeves will have “no easy options” if she seeks to raise some extra cash by reforming pension tax reliefs, AJ Bell warned.

Many think tanks have also called for pension pots to be brought into the orbit of inheritance tax. Tom Selby, director of public policy at AJ Bell, said many of the possible reforms come with “significant practical and political challenges”.

Mr Selby admitted that this was “undoubtedly a generous set of rules." “There will, for example, be lots of people who chose to transfer defined benefit pensions into a defined contribution scheme in part because they wanted to prioritise passing money on tax efficiently to loved ones,” he said.

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“If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug has been pulled from under them,” Selby continued. "The tax treatment of pensions on death will be viewed by many as low hanging tax fruit ready to be picked," he says.

"This is undoubtedly a generous set of rules and something that could easily be reviewed by the new government." When people pass away, the beneficiary of their “estate” – which essentially means their assets – may have to pay tax on what they inherit.

However, pensions generally sit outside of a person’s estate for inheritance tax purposes. A change to inheritance tax rules on pensions is also something that has also been called for by the IFS.

“Pension pots should be included in the value of estates at death for the purposes of inheritance tax. If we are to have an inheritance tax, it should apply evenly across all forms of wealth,” it had previously said in a paper on the topic.