Labour steams ahead with double tax raid ‘disaster’ on pensioners | Personal Finance | Finance
Grieving families will be responsible for calculating and paying inheritance tax on retirement savings from 2027 instead of pension firms under Government changes. Ministers had initially aimed for it to be done by pension scheme administrators rather than executors. The Government has also ignored warnings and decided to press on with a “double tax hit” on inherited pensions.
The pension pots of those who die after 75 will be subject to inheritance tax (IHT) and income tax levied on beneficiaries. All death in service benefits have been exempted from the inheritance tax change.
If a saver is over 75 when they die, their beneficiaries will have to pay income tax at their usual rate on pension withdrawals.
A pension pot can only be passed on without income tax being levied when someone dies before 75.
Rachel Vahey, Head of Public Policy at AJ Bell, said that despite a deluge of criticism, the Government has decided to press ahead with plans to apply IHT to unused pensions on death.
She told This is Money: “Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances.”
Ms Vahey said many people who have saved and invested in good faith now face the possibility of punitive rates of taxation when passing pension money to loved ones.
Former pensions minister Steve Webb told the publication that a person dealing with an estate will need to track down the pensions held by the deceased, contact the schemes, collate all the details, and then enter the information into an online calculator to work out the IHT bill.
He said this would have to be done before a probate application can be made, adding complications would arise where the family member can’t track down all the deceased’s pension pots or if providers are slow to share the information needed to calculate IHT.
If IHT is due, then it generally has to be paid by the end of the sixth month after death.
For assets which are potentially harder to sell, such as houses or certain shares and securities, it can be split into equal instalments over a decade.
According to the Institute for Fiscal Studies (IFS), the vast majority of estates don’t attract IHT. Before IHT is charged, a number of thresholds apply. The nil rate band is set at £325,000.
There is also a residence nil-rate band (RNRB) which applies when people leave their main residence, or, if higher, the value of a previously sold main residence, to their children and grandchildren. This is £175,000 for an individual and £350,000 for a married couple.
The RNRB starts to be withdrawn when an estate’s value exceeds £2million. For every £2 that an estate’s value exceeds £2m, the value of the RNRB reduces by £1.
The IHT rate on the part of an estate above the nil-rate bands is generally 40%.
Chancellor Rachel Reeves confirmed in her maiden Budget that these thresholds will be frozen until 2030.
