Financial analysts suggest there’s now a ‘reasonable possibility’ UK households could face a new ‘death duty’ form of inheritance tax (IHT) from October.
The plans could be introduced in next month’s Autumn Budget as part of the new Labour government’s efforts to address the current £22bn shortfall in the country’s finances.
Financial expert and Director of Public Affairs at The Lang Cat, Tom McPhail, has expressed concerns about the possibility of Labour introducing new IHT on pension pots as part of a broader death duty, which could impose significant tax liabilities on families inheriting pensions.
Analysis indicates that a pension worth £100,000 – roughly the average saved by individuals aged 55 to 64 – could be subject to a £65,000 tax bill if IHT is applied.
McPhail warned: “The tax treatment of pension death benefits is very generous at the moment. There’s a reasonable possibility [Labour applying IHT to pensions] will happen.”
He continued: “At the moment, people are using pension funds to make plans for their dependents. But if IHT and the avoidance of it is a concern, then people will have to restructure their retirement plans.
“Investors will be faced with a decision as to whether to try to pre-empt any move by Labour. If it looks like it’s coming, we might see people pulling out money from pension funds.”
However, AJ Bell Director of Public Policy, Tom Selby, underscored the political risks associated with any policy that could be branded as a ‘death tax’ – noting the pension tax changes introduced by former Chancellor George Osborne in 2015 made pensions highly tax-efficient on death, allowing them to be passed on tax-free in certain circumstances, reports Birmingham Live.
Selby speculated: “It is entirely possible, but not inevitable, that a future government will view this as overly generous and look to raise cash by increasing the amount of tax applied to pensions on death.
“Were this to happen, the government would need to consider exactly how to deal with people who have taken decisions about contributing to a pension or transferring a pension based on the tax rules today.”
Source: Rodger, James & Poulter, Rory. Lancashire Live. September 2024. https://www.lancs.live/news/cost-of-living/labours-potential-death-duty-could-29899401.