One in 10 families to be hit with inheritance tax in five years' time

A record one in 10 families will be hit with inheritance tax in five years’ time after Rachel Reeves made changes to death duties in her Budget.

Last year, just five per cent of deaths incurred inheritance tax, but the Institute for Fiscal Studies (IFS) said that figure would double in 2029.

Inheritance tax is levied on wealth bequeathed at death or given aways in the years beforehand, above a threshold.

Ms Reeves used her Budget to bring pension pots, previously exempt, into the tax from April 2027 - raising £1.5billion.

She also reduced reliefs for agricultural and business property - raising half a billion but sparking a furious backlash from farmers.

In addition, the present inheritance tax threshold of £325,000 will remain frozen for a further two years until 2029-30, raising another £400m.

The Treasury estimates the changes will bring in a total of £2.3 billion by 2029.

But the IFS yesterday said it would also lead to twice as many families paying inheritance tax.

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Isaac Delestre, a research economist at the institute, said: ‘The share of deaths incurring inheritance tax is forecast to go up from 5per cent in 2023 to 10per cent in 2029.

‘That would be a record high since the tax was introduced in the 1980s, and that is partially as a result of the measures introduced yesterday.’

Financial experts have also warned that children who inherit their parents’ pension pots face paying death taxes of almost 70 per cent.

Pensions that are passed on when someone dies will be taxed at 40per cent, but beneficiaries could end up getting taxed twice under the new system.

Rachel McEleney, associate tax director at Deloitte, said: ‘The removal of the inheritance tax exemption appears to result in a double hit on death benefits that do not qualify for an income tax exemption, such as those where people die over 75 years old.

‘Assuming the whole fund is subject to 40 per cent inheritance tax, and the beneficiary pays income tax at 45 per cent on the remainder, this appears to give rise to an effective 67 per cent tax rate on taxable pension death benefits.’

Gareth Henty of PwC added: ‘Making Defined Contribution pensions pots liable to inheritance tax will have significant implications for pensioners and their financial planning. 

If pensioners are unable to pass on their DC savings to loved ones without incurring inheritance tax, this is likely to accelerate the withdrawal of savings early, potentially leaving pensioners with a much smaller - or even empty - DC pot later in life when they most need it.

‘Alternatively we may see an increase in pensioners now looking to secure a guaranteed income via an annuity.

‘All of these behavioural changes are likely to mean the actual additional inheritance collected by the Treasury will diminish significantly. Individuals will now be disincentivised to pass private sector pension wealth down the generations.’