"We will close the loophole created by the previous government made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027."
- Rachel Reeves
Labour has announced that it will freeze inheritance tax thresholds until 2030 and bring inherited pensions into inheritance tax from April 2027.
During today's Budget, Chancellor Rachel Reeves said: "First, the previous government froze inheritance tax thresholds until 2028. I will extend that freeze for a further two years until 2030 that means the first £325,000 of any estate can be inherited tax free, rising to £500,000 pounds if the estate includes a residence passed to direct descendants and £1 million when a tax free allowance is passed to a surviving spouse or civil partner.
"Second, we will close the loophole created by the previous government made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027.
"Finally, we will reform agricultural property relief and business property relief from April 2026. The first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all. But for assets, but for assets over £1m inheritance tax will apply with a 50% relief at an effective rate of 20%.
"This will ensure that we continue to protect small family farms and three quarters with three quarters of claims unaffected by these changes.
"I can also announce that we will apply a 50% relief in all circumstances on inheritance tax for shares on the alternative investment market, and other similar markets, setting the effective rate of tax at 20%."
The changes are expected to raise over £2bn by the end of the government forecast period.
Claire Trott, divisional director of retirement and holistic planning at St. James’s Place, said: "The Chancellor's decision to include pensions in the IHT calculations, alongside freezing to the allowances, will likely increase the number of estates that will pay IHT significantly above the current 6%. The devil will be in the detail to determine if this includes only lump sums, or if it also includes benefits passed down by way of an income. In addition, we need to know how this will work for defined benefit pension schemes, if included, where individuals have no access to increased income to pay a charge. The delay in implementation of this change is welcome, allowing these questions to be resolved and giving individuals some time to plan."
Steven Cameron, pensions director at Aegon, commented: “The decision to bring ‘inherited’ pension pots left on death within the inheritance tax regime is a major change which may impact on retirement planning.
“For many individuals, their pension can be one of their most – if not the most – valuable asset they own. Adding pensions to estates could substantially increase the number of estates which become subject to inheritance tax. Extending the current IHT thresholds to 2030 adds to this issue.
“While everyone hopes to live many years into retirement, not all do so. Those who die early in retirement are more likely to leave a substantial pension pot which could now be brought within the IHT regime. But taking too much out of their pension too early risks running out of money later in life.
“While the Government has set out its intent, we hope there will now be full consultation around the detailed approach, and which avoids unintended changes in saver behaviour.”
Mike Ambery, retirement savings director at Standard Life, added: “It’s perhaps no surprise that the Government has decided to bring pensions into scope for inheritance tax as their exemption was little-known to the public. However, pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules. Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way. This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement. At present it makes more sense to access ISAs and other forms of saving before touching pensions. In time we’re likely to see more pensions, accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.
“The end result of this change is that many more people will now be brought into scope for IHT. While there could be some benefit to the Treasury, pensions are a long-term investment and it’s vital that large-scale changes to how they are taxed are well managed to avoid any risk of undermining confidence in pensions and scaring people from engaging with their retirement savings. Carefully thought through implementation and clarity will be key, perhaps most prominently in the case of unmarried partners who could be at a disadvantage. This is because the IHT spousal exemption means married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die, however benefits paid to an unmarried partner can face IHT charges. Now pensions are set to fall into scope for IHT, surviving unmarried partners could end up with less income and therefore a lower standard of living in retirement.”
Stevie Heafford, tax partner at HW Fisher, commented: “Inheritance tax has long been one of Britain’s most unpopular taxes. As it stands, the nil rate band, which is the amount you can pass onto your loved ones without paying any inheritance tax, is £325,000. The decision by the government to freeze this figure until 2030, rather than increase it in line with inflation, means that many people will continue to find themselves caught in the inheritance tax trap for the first time.”
