IFS Urges UK Chancellor to Scrap Pension IHT Break, Potentially Raising £2 Billion by 2028

The IFS calls on the UK Chancellor to eliminate the pension inheritance tax break, which could generate £2 billion in additional tax revenue by 2028, as it encourages wealthy individuals to accumulate pension savings to avoid paying inheritance tax.

author-image
Justice Nwafor
New Update
IFS Urges UK Chancellor to Scrap Pension IHT Break, Potentially Raising £2 Billion by 2028

IFS Urges UK Chancellor to Scrap Pension IHT Break, Potentially Raising £2 Billion by 2028

The Institute for Fiscal Studies (IFS) is calling on the UK Chancellor to eliminate the pension inheritance tax (IHT) break, which could generate an additional £2 billion in tax revenue by 2028. The IFS argues that this tax break encourages wealthy individuals to accumulate their pension savings to avoid paying IHT.

Under the current rules, unused pension funds can be passed on to beneficiaries tax-free if the pensioner dies before age 75, or with income tax payable if they die after 75. The IFS believes this is a loophole that should be closed, as the IHT exemption for pensions is not available for other types of savings, such as ISAs.

The IFS's recommendation comes as the UK government collected a record £7.1 billion in IHT revenue in the 2022/2023 tax year, driven by frozen thresholds and increasing property values. The IFS considers the pension IHT break to be one of the most attractive remaining IHT reliefs and believes it should be removed.

Why this matters: The potential scrapping of the pension IHT break could have significant implications for taxpayers and their retirement planning strategies. As the UK government seeks ways to boost tax revenue, targeting this tax relief may become an increasingly attractive option.

Experts caution that taxpayers should not rely on the IHT benefit from pensions, as it may be subject to changes in the future. They advise using alternative methods, such as donations, to reduce IHT liability. While the move to eliminate the pension IHT break would be unpopular among those affected, as it would remove a key way to avoid the "hated" death tax, the IFS and other experts suggest that the government is likely to target this relief as a means to generate additional tax revenue.

Key Takeaways

  • IFS calls to eliminate pension inheritance tax (IHT) break, could raise £2B by 2028.
  • Current rules allow tax-free pension fund transfers to beneficiaries if owner dies before 75.
  • IHT revenue hit record £7.1B in 2022/23, driven by frozen thresholds and rising property values.
  • Scrapping pension IHT break could significantly impact taxpayers' retirement planning strategies.
  • Experts advise against relying on IHT benefits from pensions, as it may be subject to future changes.