Pressure on Labour to launch IHT raid

The new Chancellor, Rachel Reeves, has been urged to consider an inheritance tax (IHT) raid on pension pots that could raise up to £2 billion a year, following suggestions from The Institute for Fiscal Studies (IFS).

The IFS, a leading economic think-tank, has offered a solution to the pressure being put on the Chancellor to meet public spending targets. They suggested that unspent cash in defined contribution funds should no longer be exempt from the ‘death tax’. 

The recommendations from the IFS aligned with recent recommendations by the International Monetary Fund (IMF) urging the Government to stick to commitments to balance the books. However, they warned that the prospect of the continuing high interest rates in the UK could make the task harder to achieve.

What is IHT? 

Inheritance Tax (IHT) is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, and investments. 

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2024/25 tax year, the threshold is set at £325,000. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free. 

For more information on IHT, check out our complete IHT guide. 

An Inheritance Tax Raid 

Both Labour and the Conservatives were criticised during the campaign for not being upfront about the tough choices they would need to make to improve the economy. During the election campaign, economists criticised both parties for not being realistic about the tough choices required, either in the form of spending cuts or tax increases. An IHT raid could go a long way to help in this regard, but it comes with many tough considerations. 

For example, there are fears that the tax raid could leave some facing double taxation. Currently, if the pension pot owner dies under the age of 75, money can be withdrawn without being subject to inheritance tax or income tax. If they die after turning 75, withdrawals by the heir are taxed as income. The latter group could face a double tax hit if IHT is also applied. 

If you’re interested in how to manage your IHT to ensure the best possible wealth protection for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice.