Yahoo Finance Grieving families risk being hit with £65,000 ‘death duty’ under Labour
Grieving families could lose an extra £65,000 if Labour brings in a pensions death duty, analysis shows.
A beneficiary with an income of £50,000 inheriting a typical £100,000 pension would pay £40,000 in inheritance tax (IHT) as well as an extra £25,946 in income tax, after the remainder of the inherited pension is added to their income that year.
It means a £100,000 pension inherited from someone who had already used up their IHT allowances would cost the beneficiary £65,946 in IHT and additional income tax.
The average pension pot for a 55 to 64 year old is £107,300, according to the Office for National Statistics (ONS).
IHT is currently not charged on pensions. But industry insiders have warned that its introduction is a risk under a Labour government.
Labour has denied that a pension death tax is “party policy” and said the Tories will do more to undermine “pensioner economic security”.
Currently, if someone dies before the age of 75, any of their unused pension is inherited tax-free.
For anyone who dies after this age, income tax applies at the point the beneficiary withdraws the money.
If IHT were applied to a £100,000 pension pot at 40pc, this would mean a tax bill of £40,000.
The beneficiaries would then be taxed on the remaining £60,000 if the pension holder was aged 75 or over and if the money were paid as a lump sum or income.
It means a sole beneficiary with an income of £50,000 would be treated as having income of £110,000 for that tax year – and incur an income tax bill of £33,432 rather than £7,486.
The calculations by Telegraph Money, verified by investment platform Hargreaves Lansdown, assume the value of the overall estate surpasses the £325,000 threshold at which IHT kicks in.
It comes as Chancellor Jeremy Hunt is set to unveil an “inheritance tax guarantee”, which means that the Conservatives will not increase the rate of death duty if they win the general election.
The Tories will also pledge not to cut the threshold at which inheritance tax is paid, and to ensure that unused pension pots are not dragged into inheritance tax.
Pensions experts have warned that Labour will be tempted to extend the scope of IHT to pension pots if it enters office next month.
Tom McPhail, of financial consultancy The Lang Cat, said the move would cause a “big disruption” for wealthier pensioners.
He added: “The tax treatment of pension death benefits is very generous at the moment. There’s a reasonable possibility [Labour applying IHT to pensions] will happen.
“At the moment people are using pension funds to make plans for their dependents. But if IHT and the avoidance of it is a concern, then people will have to restructure their retirement plans.
“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.”
Inheritance tax has become increasingly lucrative for the exchequer in recent years as soaring property prices and frozen tax allowances have pushed a growing number of families into the 40pc net.
Inheritance tax receipts surged to a record high of £7.5bn last year, according to HMRC data.
Tom Selby, of broker AJ Bell, said politicians would be extremely nervous about implementing a policy that would inevitably be portrayed as a “death tax”.
He added: “However, it is true that changes made by former chancellor George Osborne in April 2015 mean pensions are extremely tax efficient on death and can – in some circumstances – be passed on completely tax-free.
“It is entirely possible, but not inevitable, that a future government will view this as overly generous and look to raise cash by increasing the amount of tax applied to pensions on death.
“Were this to happen, the Government would need to consider exactly how to deal with people who have taken decisions about contributing to a pension or transferring a pension based on the tax rules today.”
A Labour spokesman previously said: “[A pensions death tax] is not Labour policy. Labour will always protect pensioners who have worked hard and paid into the system.
“We will guarantee the triple lock and we won’t stand by as the Tories rip apart national insurance contributions and risk the state pension or the NHS.”
