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Bereaved families face £65,000 hit from Reeves’ inheritance tax
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Bereaved families face £65,000 hit from Reeves’ inheritance tax

Thousands more grieving families will be forced to pay inheritance tax after the chancellor announced today private pensions would be subject to tax.

Attendees slammed Rachel Reeves for the “cruel” blow to grieving families, which they said was “barely more sophisticated than Russian roulette”.

Currently, if you inherit a private pension from someone who died aged 75 or over, you will have to pay income tax. If they were under 75, no tax is paid.

However, Ms Reeves’ decision to charge inheritance tax on top of this could cost 20,000 grieving families an average of around £65,000, the analysis suggests.

A beneficiary on an income of £50,000 who inherits a typical pension of £100,000 will pay £40,000 in inheritance tax from 2027. These calculations assume that they have exhausted their inheritance tax allowance.

They will also pay £25,946 in income tax once the rest of their inherited pension is combined with their income for that year.

The average pension pot for a 55-64 year old is £107,300, according to the Office for National Statistics (ONS).

But from 2027, inheritance tax will also apply to private pensions that are currently exempt from death tax.

Around 4.39% of all deaths resulted in an inheritance tax bill in 2021-22 – a total of 27,800, according to official figures.

However, the Government estimates the move would affect 8% of all estates each year, meaning around 49,000 estates that include pensions will be subject to inheritance tax. This includes 10,500 who would not have faced IHT at all if pensions had not been included and 38,500 who were already in the IHT net but will face an extra bill.

This change will also have significant ramifications for those who inherit private pensions from loved ones who died before the age of 75.

They are currently exempt from income tax when receiving an inherited private pension. But from 2027, they will be hit with an extra 40% tax if the deceased has already exhausted their tax-free inheritance allowance of £325,000.

Inheritance tax is not charged if the heir of the estate is the spouse or civil partner. Under the changes, bereaved partners will still inherit pension assets tax-free.

It comes as Ms Reeves has walked away from a number of other rumored pension raids, such as cutting the tax-free lump sum or overhauling the tax cut on employer pension contributions.