Now families face paying inheritance tax on pensions

Pensions will become liable for inheritance tax after Rachel Reeves announced a £2billion crackdown in her bombshell maiden Budget today.

From 2027, the value of pensions pots will be included in estates and caught in the net of inheritance taxes. 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.

The Chancellor has also closed several IHT tax loopholes that investors, family business owners and farmers enjoy, making it more difficult to pass money down to the next generation.

This includes reform to agricultural property relief and business property relief.

From April 2026, the first £1million of combined business and agricultural assets will continue to attract no inheritance tax at all.

But for assets over £1million, the Chancellor said inheritance tax will apply with a 50 per cent relief at an effective rate of 20 per cent.

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Ms Reeves said: ‘This will ensure that we continue to protect small family farms, with three-quarters of claims unaffected by these changes.’

Victoria Price, of tax consultancy Alvarez and Marsal Tax, said this was a bombshell announcement for family businesses.

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She explained: ‘Restricting business relief to a maximum of £1million could have dire consequences for some of the UK’s most historic companies, potentially making it difficult for them to remain in family ownership.’

The reform also included a restriction on a tax break on shares invested in small companies on the UK’s Alternative Investment Market (AIM).

Until now, AIM shares have qualified for business property relief, which means they are exempt from IHT if they have been held for more than two years at the time of death.

However, the Chancellor has announced that these investments will only receive a 50 per cent relief on inheritance tax in the future – meaning families will pay the tax at a rate of 20 per cent.

Families can still pass on up to £325,000 after death free of inheritance tax – known as the nil-rate band. The Chancellor has extended a freeze on the nil-rate band by two years until at least 2030. The threshold has been frozen since 2009.

The freeze is widely regarded as a stealth tax, with a growing number of middle-class families being dragged into its net as house and asset values rise while the threshold stands still. The phenomenon is known as fiscal drag.

Ms Reeves said: ‘Only 6 per cent of estates will pay inheritance tax this year. I understand the strongly held desire to pass down savings to children and grandchildren.’

Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said the ‘fundamental’ change to levy inheritance tax on pensions means savers will be more likely to draw money out of their retirement savings sooner.

He added: ‘Pensions have been seen as a useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.

‘The end result of this change is that many more people will now be brought into scope for IHT.’

Couples who are married or in civil partnerships can combine their allowances to pass on £650,000.

Those leaving a property to a direct descendant get an extra allowance of £175,000 each, meaning £500,000 is tax-free. A married couple can therefore pass on a family home worth up to £1million free of inheritance tax. Everything over this allowance is taxed at a flat rate of 40 per cent.