The UK is experiencing a significant shift in its financial landscape as the Labour government proposes a new ‘death duty’ aimed at UK households. This move comes amid a pressing effort to address a £22 billion deficit left by the Conservative Party.
The Impact of the Proposed Inheritance Tax
The proposed inheritance tax has sparked considerable debate, especially as it coincides with the current Cost of Living crisis. Analysis indicates that families inheriting a £100,000 pension—roughly the size of the average pension pot for people aged 55 to 64—could be hit with a staggering £65,000 tax bill. This potential ‘death tax’ raid on pensions presents a substantial financial threat for many households.
Tom McPhail of financial consultancy The Lang Cat expressed concerns about the ramifications of such a tax. He stated, “The tax treatment of pension death benefits is very generous at the moment. There’s a reasonable possibility that Labour will apply IHT [inheritance tax] to pensions, which could cause big disruptions for wealthier pensioners.”
McPhail added that many people use pension funds to plan for their dependents. If inheritance tax becomes an issue, substantial restructuring of retirement plans may be necessary. “Investors will be faced with a decision as to whether to try to preempt any move by Labour. If it looks like it’s coming, we might see people pulling out money from pension funds,” he said.
Political Tensions and Future Implications
While the government scrambles to solve financial woes, political figures such as Tom Selby of broker AJ Bell argue that implementing a ‘death tax’ could be politically risky. Such a policy would likely be seen as targeting pensioners in an unfair manner.
“Politicians would be extremely nervous about implementing a policy that would inevitably be portrayed as a ‘death tax’,” Selby said. However, he also mentioned that pensions have become increasingly tax-efficient since changes made by former chancellor George Osborne in April 2015. In some cases, pensions can even be passed on completely tax-free.
“It’s entirely possible, but not inevitable, that a future government will view this as overly generous and seek to raise cash by increasing the amount of tax applied to pensions on death,” Selby noted. Should these changes occur, the government would need to consider how to manage people who have based their pension investments on the current tax rules.
This potential shift in inheritance tax policy raises numerous questions and concerns for UK households, which will need to be addressed in the coming months.
