Wealthy families could face a double tax hit of up to 70.5 percent on inherited pensions under new rules Announced in Wednesday’s budget.

Chancellor plans to hold pensions accountable inheritance tax (IHT) As well as other assets such as property, savings and investments from April 2027.

But if a saver is over 75 when he dies, his beneficiaries will still have to pay the ordinary income tax rate of 20 percent, 40 percent or 45 percent on pension withdrawals, and experts say double that. taxation.

To talk IGary Smith, financial planning partner at Evelyn Partners, said it was likely a “significant number” of families would be affected, although it was difficult to pin down an exact figure.

IHT is usually payable at 40 per cent on a deceased person’s estate, but only on amounts over £325,000. This threshold can be increased significantly in many cases and there are numerous exemptions; For example, leaving money to the spouse.

The rate of income tax paid by someone who inherits a pension depends on the recipient’s ordinary tax rate.

If someone has an estate of £2 million and a pension of £4 million and they choose to leave their pension to additional rate taxpayers, they will first pay IHT of £1.6, leaving them with a pension of £2.4 million. They will then pay income tax of 45 per cent on this £1.08 million, leaving £1.32 million, meaning 67 per cent has already been lost to tax.

But pension scheme assets also have the effect of reducing the £350,000 rate to zero, known as the residence nil rate band. This is equivalent to £140,000 of IHT on the effective pension scheme, meaning an effective tax rate of 70.5 per cent.

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By contrast, pensions are currently treated generously by the taxman when people die, especially when they die before the age of 75; In this case, they are usually inherited without any tax being paid.

It has therefore become widely used as a way of transferring wealth across generations, and is often spent last by those whose estates may be affected by IHT.

But pensions are supposed to fund retirement rather than leaving wealth to loved ones, and the Government stressed in its Budget earlier this week that it wanted to end this practice.

Rachel Reeves He said that by bringing unspent pots within the scope of IHT, it “removes the opportunity for individuals to use their pensions as a tool for IHT planning”.

It expects this to affect around 8 per cent of properties each year, generating revenues of £640 million in 2027-2028, £1.34 billion the following year and £1.46 billion in the third year the new rules come into force.

Experts, including Mr Smith, said they would not be surprised if this “double taxation option” changed as the proposal went through the consultation process.

Andrew Marr, managing partner at tax consultancy Forbes Dawson, said: “We have seen many tax measures introduced over the years, but for some families the impact is overwhelming and gives the impression of retrospective taxation.

“I use world as ‘retrospective’ because the people involved reasonably believed that their pension funds would be outside the scope of IHT and often made contributions with IHT protection in mind.

“Additionally, because these rules will not come into effect until April 6, 2027, they will have the unpleasant effect of making seniors realize that dying after April 5, 2027 will have significant negative financial consequences for the beneficiaries of their estate.”

Mr Marr said there was a “small chance” the Government would make a U-turn before these rules became law.

He added: “By the way, this really throws off the balance of the decision on whether to withdraw the 25 per cent tax-free lump sum from pensions.”

Mr Marr said anyone thinking of leaving unused retirement funds should consider taking the lump sum and gifting it.

He said: “Even if they don’t make a gift, their beneficiaries will be avoiding double tax on the scheme when they die.”