The Chancellor’s decision to include leftover pension pots in the calculation of IHT will mean grieving families could face hefty tax bills on funds previously sheltered from taxation.
This brings the total affected estates in the first year of the measure’s implementation to 49,200, according to calculations by interactive investor (ii).
Over three years, some 152,700 estates will face new or increased IHT bills.
Who will this affect?
Richard Wilson, chief executive of ii, said: “The current proposals are an affront to people who have done the right thing by diligently investing through a pension throughout their working lives to ensure financial resilience in retirement, while also taking proactive steps to create an effective estate plan that complies with existing tax rules.
“Including pensions in IHT calculations creates the prospect of double taxation, where the pension pot exceeds the IHT threshold, and the beneficiary is taxed again at their marginal income tax rate.
Currently, it is possible to pass on £325,000 without paying IHT – which is charged at 40 per cent – because of something called the nil-rate band.
After April 2027, when the measure will be introduced, if the total value of your estate, including any remaining pensions, exceeds the nil-rate band (and the residence nil-rate band if passing on a family home to children or grandchildren), IHT will likely become payable.
What about income tax?
For those who die aged 75 or older, any pensions inherited by beneficiaries will also be subject to income tax at the beneficiary’s marginal rate.
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Read MoreAs a result, inherited pensions could be subject to “double taxation”, creating an effective tax rate of 52 per cent for pension pots passed on to basic-rate taxpayers, rising to 64 per cent and 67 per cent for higher and additional-rate taxpayers, respectively.
Myron Jobson, senior personal finance analyst at ii, said: “The Government appears to be tightening the screws on IHT, effectively widening the net to capture more estates.
“The net will be bursting at the seams by the end of the decade if the latest proposals come to fruition.”
How much will this change bring in for the Government?
According to data from the Office for Budget Responsibility (OBR), if the proposal is enacted, in the 2027/28 tax year alone, the average IHT liability is expected to be £169,000, increasing by around £34,000 when pension assets are included in the value of the estate.
But estimates by pensions consultancy LCP suggest that this figure will rise sharply through the 2030s and beyond, raising well over £3bn per year at peak.
Despite the backlash, Reeves has defended her Budget changes, saying she is “putting more pounds in people’s pockets”.
Jobson added: “Including pensions in IHT calculations would mark a seismic shift, particularly for those who have meticulously crafted estate plans around the current rules.
“This change would force many to rethink their plans entirely, potentially accelerating drawdowns during their lifetime to reduce tax exposure.
“It could also undermine the incentive to save into pensions, disrupting long-term financial security for future generations.”
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