With HM Revenue & Customs’ technical consultation on inheritance tax and pensions due to close on 22 January, AJ Bell has urged the government to consider alternatives to current proposals, which would be “simpler and fairer.”
In the Autumn Budget, Chancellor Rachel Reeves announced that from April 2027, unused pension funds would be counted as part of the estate when working out inheritance tax (IHT) due.
However, AJ Bell director of public policy Tom Selby has warned that the plans to extend the IHT net to pensions “risks backfiring on a big scale.”
He said: “The proposals will create huge complexity, causing delays in families being able to access money as well as potentially hiking up costs for executors and beneficiaries. This will cause misery for families, as well as additional work and costs for HMRC and pension providers.”
Selby said the spectre of ‘double taxation’ could result in millions of people paying a minimum tax rate of 64% on inherited pensions, resulting in a risk that confidence in pensions will be seriously eroded.
Instead, AJ Bell is calling on the government to consider alternative proposals which it says will be fairer and simpler without undermining its plan to tax unused pensions on death.
One option would be to treat pensions in a similar way to ISAs on death. Currently, ISAs are subject to IHT and this provides a pre-existing template for pensions and means investments are treated equally as part of the estate, the investment platform said.
Alternatively, income tax could be applied to all withdrawals at the beneficiary’s marginal rate regardless of the age at which the pension saver dies.
Selby added: “This is not yet ‘a done deal’; there is still time for the government to pivot and adopt a more pragmatic solution saving time, money and distress for millions of families.”
Main image: thomas-kelley-hHL08lF7Ikc-unsplash
