Chancellor Rachel Reeves may use the Budget to unveil inheritance tax changes on pensions, which could have a “big effect on people’s behaviour”, says Hargreaves Lansdown.
Reports have suggested that Reeves will tweak the tax treatment of defined contribution pensions to make them subject to inheritance tax. As it currently stands pensions are usually outside of a person’s estate for inheritance tax. With income tax also not payable if death occurs before age 75, it means that people have looked to spend their other assets and leave their pension to pass on to loved ones.
Making pensions subject to IHT, or a levy on death, has the potential to drag many more people into the taxpaying net, says the investment platform. Under current rules, IHT is payable at 40% on estates worth more than £325,000 and if an individual is passing the family home down to children or grandchildren, they also benefit from a residential nil rate band worth £175,000.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inheritance tax could be a top contender for reform in the upcoming Budget. A change could see the loved ones of a single child-free person with a home worth £300,000 and a pension worth £200,000 being slapped with a £70,000 bill when under current rules there would be no IHT to pay.
“How such a change would work in practice remains to be seen. In the case of death post age 75, we could see IHT levied or a separate charge on the pension asset as was the case pre-Freedom and Choice. A separate charge would be a simpler option to implement.”
Morrissey said any such change would have a big effect on people’s behaviour, with people looking to run down their pension during their retirement whether it be through gifting to loved ones or increased spending.
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