Bringing pensions into the scope of inheritance tax is the most unpopular tax raising measure announced by the Labour Government since entering office a year ago, new research shows.
According to AJ Bell, just 21% of Brits support the pension IHT proposals, due to come into force from April 2027, with more than double (44%) opposed to the plans. The proposals mean any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT.
Once passed to the beneficiary, income withdrawn from the pension can then also be subject to income tax at their own marginal rate.
AJ Bell has warned that the proposals are likely to result in significant delays and complication in the inheritance process for bereaved families, while also subjecting some to punitive rates of taxation.
The firm has called on Chancellor Rachel Reeves to consider alternatives, including extending income tax on pensions to all beneficiaries.
Tom Selby, director of public policy at AJ Bell, said: “It’s not hard to see why individuals object to widening out the net of inheritance tax to catch pensions, perhaps resenting that their loved ones may be asked to pay tax twice on inherited pension funds, once through inheritance tax, and again via income tax.
“This potential double whammy of taxation will be seen as unfair by some and could put off people saving in pensions in the first place or encourage others to run down pension pots; leaving themselves with little to live on in later years.
“In some cases, the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly. We’re urging the Chancellor to instead consider alternative proposals which would be fairer and simpler, without undermining her plan to tax unused pensions on death.”
AJ Bell’s research also showed strong opposition to other measures, including the decision to raise employer national insurance, with 41% against the tax rise compared to 24% in support of it.
Raising rates of capital gains tax and restricting IHT relief available to farmers were also unpopular.
Selby added: “Having committed before the election not to raise taxes on workers and putting the headline rate of income tax, VAT and national insurance off limits, government has taken a piecemeal approach to tax rises, increasing taxes on employers, investors and pensioners in the process.
“This data shows tax rises of every shade are divisive. While some tax increases attract a balance of support, they still divide the room. Nothing that emerged from Rachel Reeves’ red box over the last year enjoys support from a majority of voters, illustrating that even less controversial tax changes are still politically fraught.”
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