How the devil is in the detail when it comes to Rachel Reeves' death tax - and it's more sinister than first thought
Rachel Reeves says she will bring inherited pensions into inheritance tax from …
GB News
Rachel Reeves threw retirement plans into disarray last week by introducing a cruel pensions death tax.
Making pensions eligible for inheritance tax was viewed initially as punishing prudent savers who died early in their retirements, before they could spend their hard saved money.
Many saw it as a spiteful measure that punished aspiration, hit families at a time of grief and taxed money that had already been taxed when it was first earnt.
But, nine days on from the budget, experts have drilled down into the details and found ways Reeves’ reforms will heap further misery on savers that aren’t only cruel, but almost unworkable.
The first is the fact the Treasury is now including money that isn't technically yours on the value of your estate when you die.
Currently, pensions operate under a system of deferred taxation as the money you pay into them isn’t subjected to income tax to encourage people to prepare for retirement.
Income tax does catch up eventually though as it applies to money you withdraw from your pension as though it were regular income.
This is why it is costly to withdraw large chunks of your pension early as that would be a tax loophole.
What Reeves’ budget does is totally ignore the initial relief you would have received from income tax and count it towards the value of your estate, inflating the amount of your estate eligible for inheritance tax.
Chancellor of the Exchequer Rachel Reeves delivered her Budget to the House of Commons last weekPAExperts are undecided whether making more of your wealth taxable when you die is an intended cruel measure or a careless one.
For example, you would only ever see £600,000 of a £1million pension after income tax is deducted.
But Labour’s new law will mean the full £1million is counted towards your estate and therefore eligible for inheritance tax, despite the fact £400,000 of it was going to the Treasury if you survived anyway.
The second way Reeves’ reforms will hit Brits inheriting pensions is by introducing layers of red tape, an added headache at a time of grief.
Previously, if a spouse died their partner was able to inherit their pension in a matter of days, allowing them financial freedom while they grieved.
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But under Reeves’ new plans recently widowed spouses may have to wait months while the Treasury settles the final inheritance tax bill.
A former senior executive in the pension world said: “You are talking about dumping a massive bag of sand on to the slick gears of the pension death benefits system.
“There are going to be grannies who are growing old and hungry because their husband left a £1m pension but they cannot touch it because (the Government) still hasn’t collected the inheritance tax.
“This is going to unravel; they just haven’t thought it through.”
The Chancellor is also adding 1.5 percentage points on the interest rate on money owed in inheritance tax.
This means grieving families, even if they can’t pay through no fault of their own, will eventually pay more to the taxman.
These rules are set to come into force April 2027.
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