The Labour Party’s new tax policy, led by Chancellor Rachel Reeves, is stirring concern among British households. Starting April 2027, unused pension pots will no longer enjoy protection from inheritance tax (IHT). This move could inflate IHT bills to six figures, even for what are traditionally considered modest estates.
This policy change, part of the Autumn Budget, has sparked fears that middle-income families could be disproportionately affected, particularly when combining property and pension values.
New Rule: Pensions Now Taxed Like Property
From April 2027, any unused pension savings will be treated just like property and investment assets when calculating inheritance tax. Currently, pensions are often exempt, providing families with a significant buffer.
- Estates that exceed the current IHT threshold will be taxed at a rate of up to 40%.
- This change impacts not just the wealthy, but average earners with reasonable pension contributions and home ownership.
Tax Bill Estimates Under New Rules
Financial planning firm Quilter has provided alarming estimates based on current property prices and average pensions:
| Scenario | Property Value | Pension Value | Estimated IHT Bill |
|---|---|---|---|
| Average single homeowner in England | £290,395 | £415,000 | £82,158 |
| Average London homeowner | £565,637 | £415,000 | £192,254 |
These figures demonstrate how “average” estates could face tax burdens previously associated with the wealthy.
Why This Policy Raises Concerns
According to Jon Greer, Head of Retirement Policy at Quilter:
- Taxing pensions that were never accessed due to the policyholder dying before minimum pension age is deeply unfair.
- Cohabiting couples are hit hardest as they don’t benefit from spousal relief or tax allowance transfers.
- Families with young children might face six-figure tax bills while grieving the loss of a loved one.
- Meanwhile, married couples retain significant tax exemptions, creating inequality.
Greer calls on policymakers to consider exemptions or transitional relief for working-age deaths, especially when minor children are left behind.
Government’s Justification for the Change
A Treasury spokesperson defended the policy by stating:
“We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth.”
They also claimed that more than 90% of estates will still not pay inheritance tax, even after these reforms. However, critics argue that this figure does not reflect the financial burden on bereaved working families or those in high-cost regions.
With the removal of the inheritance tax exemption for pensions, many families may face a substantial and unexpected financial strain during an already devastating time.
While the policy aims to close tax loopholes and refocus pensions on retirement savings, it risks disproportionately affecting average working households, especially those with young dependents and unmarried partners.
If transitional relief or specific carve-outs aren’t introduced, this change could undermine the financial security of countless grieving families.
FAQs
The new policy removing pension IHT exemption will come into effect in April 2027.
Single homeowners, cohabiting couples, and working-age individuals with moderate pension savings are likely to be most impacted.
Yes, married couples benefit from spousal IHT exemptions and allowance transfers, which reduce or eliminate the tax burden.
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