UK households face being dragged into 'dreaded' tax of 70 per cent

Families face a 'death tax' of 70 per cent after Chancellor Rachel Reeves changed rules around pensions in her Budget. The Labour Party Chancellor announced that from 2027 the value of pensions pots will be included in estates.

This means thousands of grieving families will be dragged into paying the dreaded death duty for the first time at a rate of 40 per cent. Rachel McEleney, of accountancy firm Deloitte, said according to The Telegraph: "The removal of the inheritance tax exemption appears to result in a double hit on death benefits that do not qualify for an income tax exemption, such as those where people die over 75 years old."

She said: "'Assuming the whole fund is subject to 40 per cent inheritance tax, and the beneficiary pays income tax at 45 per cent on the remainder, this appears to give rise to an effective 67 per cent tax rate on taxable pension death benefits."

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Family members pay income tax on pension withdrawals at their marginal rate, if a person dies after the age of 75. And experts have warned basic rate tax payers could be dragged into the highest band depending on how they withdraw the money.

Gareth Henty of PwC added: "Making Defined Contribution pensions pots liable to inheritance tax will have significant implications for pensioners and their financial planning. If pensioners are unable to pass on their DC savings to loved ones without incurring inheritance tax, this is likely to accelerate the withdrawal of savings early, potentially leaving pensioners with a much smaller - or even empty - DC pot later in life when they most need it.

"Alternatively we may see an increase in pensioners now looking to secure a guaranteed income via an annuity. All of these behavioural changes are likely to mean the actual additional inheritance collected by the Treasury will diminish significantly. Individuals will now be disincentivised to pass private sector pension wealth down the generations."