Britons could be hit with a tax raid under Labour’s agenda even if they die young, experts are warning. The Government has confirmed that retirement savings will become subject to inheritance tax from April 2027, regardless of whether savers access their funds before death.
The Treasury’s decision means that beneficiaries inheriting pension pots could face a 40 per cent levy on these assets, even when the deceased never reach state pension age.
Confirmed in last year’s Autumn Budget, the significant policy shift abandons the current system where pension funds pass to beneficiaries without tax implications.
The change forms part of the Chancellor’s efforts to address mounting pressure on public finances, with reports suggesting she needs to find up to £50billion through increased taxation or reduced spending.
Britons are prepping for Labour’s inheritance tax raid
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HM Revenue and Customs (HMRC) has confirmed the levy will affect pension funds even when savers have never withdrawn any money before their death.
The tax authority maintains that these measures will encourage people to use pensions for their intended retirement purpose rather than as wealth transfer vehicles.
Furthermore, someone’s pension could be liable for the levy before reaching retirement age, at which point they can begin accessing their savings.
As it stands, someone can get a hold of their pension pot once they turn 55 but this amount rises to 57 from April 2028. Government estimates indicate that approximately 10,000 additional estates will fall within inheritance tax requirements once pension assets are included from 2027.
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More households could be at risk of paying more to HMRC
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GETTYAccording to official projections, incorporating pension funds will increase average estate values by roughly £34,000.The changes will not affect death in service payments, which will remain exempt from inheritance tax obligations.
Currently, estates valued below £325,000 remain exempt from inheritance tax obligations but there are options for households who exceed this allowance.
Married couples and civil partners can combine their allowances, potentially shielding up to £1million from taxation when specific conditions are met.
The threshold increases to £500,000 when individuals bequeath their primary residence to direct descendants, including adopted, foster or stepchildren, as well as grandchildren.
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This comprises the standard £325,000 exemption plus an additional £175,000 residence allowance. Transfers between spouses or civil partners remain completely exempt from inheritance tax.
Additionally, estates that donate at least 10 per cent of their net value to charitable causes benefit from a reduced rate of 36 per cent rather than the standard 40 per cent levy.
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James Ward, Head of the Private Client Practice at Kingsley Napley, noted that the pension changes could significantly alter inheritance tax rankings across constituencies.
He observed that “IHT remains one of the most unpopular taxes that people resent their families or beneficiaries paying”, while highlighting various planning strategies including annual exemptions and regular gifts from surplus income.
Shadow Chancellor Mel Stride condemned the pension taxation plans as “tantamount to class warfare”. Meanwhile, policing minister Diana Johnson declined to rule out potential introduction of lifetime gift caps when questioned about further inheritance tax reforms.
The Treasury stated it remains “committed to keeping taxes for working people as low as possible”.
