Not for the first time, Rachel Reeves has stumbled into a minefield of her own making. And once again, it’s going to blow up in her face.
In the Budget, Reeves announced that she was going to impose inheritance tax (IHT) on unused pension pots when people die, from March 2027.
The Labour left loved it. At last, a Labour chancellor bashing the rich!
As with every other ideologically driven tax raid that Reeves launched during the Budget, the plan fell to pieces at its first contact with reality.
Imposing inheritance tax on unused pension sounds simply in theory but in practice it’ll be a disaster.
As I warned shortly after the Budget, it could lead to families handing over a staggering 67% of any pension they inherit, once income tax charges are included. Some could pay even more.
It will make probate even more complicated. Families will have to pay the pensions IHT charge within six months, even if they haven’t got their hands on the pot.
Also, millions of pensions have gone astray. If uncovered later, the IHT charge will be have to re-calculated all over again.
Now another problem has emerged. One that will hit the families of some of the bravest people in the country, at the worst possible time.
A consultation period on the Chancellor’s plans closed on Wednesday, January 22. Pension experts have responded by tearing Reeves’s proposals apart, damning them as “unworkable”.
The IHT charge will primarily apply to both workplace and personal defined contribution pension schemes, where the money is invested in the stock market.
It may also apply to workplace defined benefit schemes, also known as final salary pensions, which pay death-in-service benefits to surviving family members.
From March 2027, beneficiaries may have to pay tax on that benefit.
That’s a cruel blow for any family whose main breadwinner dies early, as they may lose 40% of their death-in-service payout.
It’s particularly brutal on the families of those who put their lives on the line every time they go to work, such as firefighters.
The Firefighters Pension Scheme Advisory Board has spotted the danger. Thanks to Reeves, it fears the death grants it pays to fire fighters families would be subject to IHT from April 2027.
The board has written to the HMRC consultation, pointing out that if members die in the line of duty, their familes risk being hit by inheritance tax.
Can you picture it?
The grieving family of a young, brave firefighter who put their life on the line being told that the death-in-service benefits they assumed would ease their financial worries will be subject to IHT? That 40p in every £1 will go to HMRC.
Some reward for a life of service.
It would see the suffering families of public servants who made the ultimate sacrifice pay a levy originally aimed at the super rich?
It doesn’t bear thinking about. Certainly not for the Firefighters Pension Scheme. It warns that scheme managers would be responsible for paying and reporting IHT to HMRC.
What a job. What a nightmare.
This is just the latest Budget shocker for Rachel Reeves. She has to scrap this plan.