Rachel Reeves’s pension death tax: your questions answered

Telegraph Money explores ways to shield your wealth from Reeves’s tax raids

If you still feel in need of help, you can send your queries to Mike Warburton, our tax columnist, at [email protected]; Charlene Young, our pensions doctor, at [email protected]; or Gary Rycroft, our resident legal expert, at [email protected].
Rachel Reeves’s bombshell Budget has forced families to hurriedly rethink their financial plans.
The most significant changes, due to take effect in April 2027, are to inherited pensions.
Telegraph Money has been inundated with emails and letters from readers trying to work out how best to shield themselves and their families from Labour’s raid.
Below our expert writers have answered a small sample of your questions.
From 2027, pensions won’t be exempt from inheritance tax, meaning it could be time to consider alternatives.
Money you make from an Isa is tax free, although you can’t deposit more than £20,000 a year.
Mike Ambery, of Standard Life, said Isas can increase your options and flexibility at retirement, but warned of several considerations.
“Remember, money taken from your pension beyond the 25pc tax-free cash is subject to income tax, so while withdrawals from your Isa are tax free, the initial transfer from your pension could be taxable.
“Also, pensions sometimes offer lower charges and some offer access to a greater diversity of investments.
“Definitely consider your plans for the money and the type of Isa before transferring. Like pensions, stocks and shares Isas can benefit from compound investment growth.
“Cash-based Isas have less chance of keeping up with inflation long-term, so are better options for accessing the cash quickly.”
There has been no indication (yet) that Labour is planning to change the tax treatment of Isas or reduce the main £20,000-a-year adult allowance, or the £9,000 allowance for Junior Isas.
As you haven’t exchanged, you’ll sadly have to pay the increased stamp duty rate.
The surcharge on second home purchases went from 3pc to 5pc within hours of last week’s Budget, with Labour bringing in the changes as of midnight October 31.
Estate agencies rushed to exchange contracts before the cut-off point, but those who weren’t in a position to finalise the contract in time now face the 5pc rate.
A £350,000 second home purchase now comes with a £22,500 stamp duty charge, compared with £15,500 prior to the Budget.
Those who exchanged before October 31 but are yet to complete the purchase will still benefit from the lower 3pc rate.
Just make sure to hold tight to the agreed deal. Do not tweak the contract before completion, as doing so will likely make you liable for the 5pc rate.
Stamp duty thresholds also changed in April 2025, so exchanges made after that date will attract even higher bills.
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Before the Budget, a family business could pass from generation to generation with no inheritance tax due. But from April 6 2026, only up to £1m will be outside the tax net.
Over this threshold, business assets will be subject to a 20pc charge. This means a child inheriting a £2m company will now face a £200,000 bill – where previously there would have been no tax to pay.
Some entrepreneurs may be wondering if they can avoid the tax hit by giving away their company to their children now before the rules kick in. But the Chancellor has shut off this escape route by applying the new rules to gifts made following the Budget.
As a result, someone gifting a company to their child today would need to survive seven years – as per the usual inheritance tax rules – for the business to leave their taxable estate.
There would be no tax due if the donor died before April 2026, but after that their death could result in an inheritance tax charge until the seven-year clock ran out.
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Yes, if you leave your self-invested personal pension, Sipp, to your spouse or civil partner it is exempt from inheritance tax.
Rachel Reeves announced that private pensions will be subject to inheritance tax from April 6 2027. But married couples can still inherit assets free of inheritance tax.
Helen Morrissey, head of retirement analysis at stockbroker Hargreaves Lansdown, said: “The basic mechanics of how inheritance tax works remain the same. This means that married couples will continue to be able to inherit assets from their spouse or civil partner free of inheritance tax.”
Spouses can also inherit unused portions of their nil-rate bands.
“This added to their own allowances means a surviving spouse can pass down up to £1m (including a family home) to their children or grandchildren inheritance tax-free with their pension likely to be included as part of their estate,” Morrissey added.
Bear in mind – cohabiting couples do not receive the same treatment.
Trusts have been a popular way to pass unspent pension pots on to beneficiaries where the pensioner has died before age 75.
They can be used as a tool to add conditions to the money before it is passed on. For example, it can only go to the beneficiary once they reach a certain age.
However, when nominating a trust to receive your pension funds, the transfer to the trust only occurs on death and, under the proposed new rules, assuming your total estate has a value over the inheritance tax threshold, the money would be liable for inheritance tax.
Furthermore, where death occurs after age 75, the funds could also suffer income tax on passing into the trust.
However, if you take the money out of your pension now and put it in the trusts, it will be outside your estate and so exempt from the tax, subject to the usual seven-year rule.
However, you may pay a tax charge when assets are transferred to a trust, as well as income tax when you withdraw the pension, so careful planning is required.
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You can’t transfer your non-activated pension directly to a beneficiary. Ordinarily, the pension holder must die first in order for any remaining pension to be given away to a beneficiary, in this case to your children.
Before Labour’s changes come into effect in 2027, it is still the case that no tax applies to pensions inherited from someone who dies before the age of 75. Should they pass away any older, the beneficiary pays income tax on the gain at their own marginal rate.
If you are yet to use your tax-free lump-sum, currently £268,275 or 25pc of your pension pot, you could give this money to your children.
Normal tax would apply after the £3,000 annual tax-free gift allowance, or up to £5,000 as a wedding gift if one of your children is getting married.
Quite possibly. Lawyers are recommending people write in precise details about what they want to happen to their pension should they die either side of the date the reforms take effect.
Before April 2027, it might make sense to pass a pension to your children, but afterwards it would be more tax-efficient for it to go to a surviving spouse.
Speak to your pension provider about updating your “expression of wishes” or “nomination of beneficiaries” form.
Yes, depending on how death in service payments are administered by your company.
Some schemes make death-in-service payments (which are typically a multiple of salary) from a group life insurance policy held in trusts, and therefore not within the scope of inheritance tax on that basis.
However, other schemes make death-in-service payments as a pension lump sum payment, which will be in scope of the tax. This includes the police pension scheme, meaning that the families of deceased officers face losing as much as 40pc of the money they receive.
I’m afraid the effective tax rate could be even higher. For large estates worth more than £2m, a tax-free inheritance tax allowance granted to passing on family homes begins to be lost.
Accountants RSM said that a £2m estate, including a property but no pension and left to direct descendants where death occurred after age 75, would have around £400,000 deducted in inheritance tax. The family would receive £1.6m.
Under Ms Reeves’s new rules, however, if the same estate also included a £700,000 pension, bringing the total value to £2.7m, grieving relatives would receive just £60,667 more – at an effective tax rate of 91pc.
This is because as well as inheritance tax now applying, income tax would also be charged, most likely at the top 45pc rate.