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Hunt pledged to axe inheritance tax – now he could impose it on your biggest asset instead

The influential Institute for Fiscal Studies (IFS) is calling on the Chancellor to scrap what is possibly the most attractive surviving IHT break of all. It reckons that by doing so, he could generate up to £2billion worth of tax revenue over the next few years.

It would be hugely unpopular among those affected, because it would destroy one of the best methods families have of avoiding the hated death tax. Their pension pot.

Your pension is your secret weapon in the fight against it IHT. For most people, this is their biggest asset after their home (which is subject to IHT), so there’s a lot at stake.

Many do not even realise pensions can be passed on free of IHT. That may not be the case for much longer.

IHT is regularly voted the UK’s most hated tax and is getting more punitive, with the £325,000 nil-rate band frozen since 2009, eroding its value in real terms. It will remain frozen until at least 2028.

The Treasury took a record £7.1billion in IHT receipts in the 2022/23 tax year and this will continue to climb, said Stephen Lowe, director of retirement advisers Just Group. “Frozen thresholds and rising property values have dragged more estates into paying the tax.”

Now the IFS wants Hunt to turn the screw, and if he doesn’t there is a pretty good chance Shadow Chancellor Rachel Reeves will do it instead, should the Labour Party win the next election.

IFS senior research economist David Sturrock said inheritance tax is littered with special reliefs and exemptions, and they need to go.

Top of the list is pensions.

Under existing rules, people with defined contribution pensions can pass on unused funds to loved ones free of IHT when they die.

The IFS tank said this loophole encourages wealthy people to hoard their pension savings to avoid paying tax.

If pension holders die before age 75, their family can inherit their pot entirely free of tax. However, if they die afterwards, their beneficiaries will pay income tax on the money.

This means they could be taxed at 20, 40 or even 45 percent, depending on their tax bracket. The IHT rate is 40 percent.

Andrew Tully, technical services director at advisory group Nucleus Financial, said the pensions tax break does not apply to other forms of savings, including Isas.

While Isas are free from income tax and capital gains tax in your lifetime, they may be liable to IHT (assuming your total worth exceeds the thresholds).

READ MORE: New pensioner tax threat as Labour demands they pay both NI and IHT on pensions

Tully said many try to use up Isas and other savings before making pension withdrawals. “By leaving your pension until last, you could potentially pass more of your wealth to those you love.”

Most people can’t do this because they need every penny of their pension. Which makes this an easy target for the Treasury.

The moment you take money out of your pension, it instantly becomes part of your estate and may be subject to IHT. This includes the 25 percent tax-free cash element.

Lowe said the IHT exemption for pensions has always looked like a ‘loophole’ likely to be tinkered away by a government seeking more cash. “Anybody using this must be aware of the possibility of future legislation changes.”

He said you cannot rely on the pensions IHT break, and should use other methods such as gifting, to reduce your liability.

However, gifting allowances haven’t increased for years, reducing their effectiveness as the IHT net tightens. Soon there could be one less, in yet another blow for hard-pressed taxpayers.


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