Rachel Reeves delivers Inheritance Tax hammer blow for bereaved families

Hundreds of thousands more grieving families will be forced to pay inheritance tax after Rachel Reeves announced private pensions would be subject to the levy.

Campaigners slammed the Chancellor for the "cruel" blow which they warned could cost bereaved families around £65,000.

The hammerblow was one of three changes to the hated "death tax" including extending the IHT personal allowance threshold until 2030 and potentially crippling agricultural and business relief reforms for farmers.

Currently, if you inherit a private pension from somebody who died at the age of 75 or over, you will need to pay income tax.

If they were under the age of 75, there is no tax payable.

But Ms Reeves's changes mean a beneficiary with an income of £50,000 inheriting a typical £100,000 pension will pay £40,000 in inheritance tax from 2027.

These calculations assume they have used up their inheritance tax allowance.

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

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

Delivering her Budget in the House of Commons Ms Reeves said: "Only 6 per cent of estates will pay inheritance tax this year.

"I understand the strongly held desire to pass down savings to children and grandchildren, so I am taking a balanced approach in my package today.

"First, the previous government froze inheritance tax thresholds until 2028. I will extend that freeze for a further two years, until 2030.

"That means the first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence passed to direct descendants, and £1million when a tax-free allowance is passed to a surviving spouse or civil partner."

The change will have significant ramifications for those inheriting private pensions from loved ones who have passed away before the age of 75.

Currently, they are exempt from income tax on the receipt of an inherited private pension. But from 2027, they would be hit with an additional tax bill of 40% if the deceased has already used up their tax-free inheritance allowance of £325,000.

A beneficiary of a private pension pot of £100,000 from somebody who has passed away before the age of 75 will be forced to fork out an additional £40,000.

This means somebody who dies young and suddenly - and may not have planned for later life - stands to lose a significant portion of their retirement savings to the taxman.

John O'Connell, chief executive of the TaxPayers' Alliance, said: "The Chancellor's decision to levy inheritance tax on private pension inheritance is a particularly cruel and capricious means of raising revenue and will only add to the sense that tax liabilities upon death are scarcely more sophisticated than a game of Russian roulette.

"Rachel Reeves should abandon this policy before it wreaks havoc on family finances."

Sarah Coles, of investment firm Hargreaves Lansdown, added: "There's something unpleasant about the taxman visiting the estate of someone who has died in order to fill his pockets, so it's going to be particularly unwelcome that HMRC is set to dig deeper."

Alongside changes to pension pots, the Chancellor confirmed that she was extending the freeze on thresholds until 2030. It was due to expire in 2028.

Former Pensions minister Steve Webb, a partner at consultants LCP, said: "A combination of an increasing state pension and frozen tax thresholds means we will soon be in the nonsensical situation where the new state pension will be just a few pounds above the income tax threshold.

"This means that people whose only income is the standard new state pension will be dragged into income tax.

"Long gone are the days when retirement meant no longer having to deal with the tax office."

Ms Reeves also announced that from April 2026, farming families will face new financial burdens once they pass their assets down.

"We will reform agricultural property relief and business relief from April 2026, the first £1million of combined business and agricultural assets will continue to attract no inheritance tax at all.

"But for assets over £1million, IHT will apply with a 50 per cent relief and at an effective rate of 20 per cent.

"This will ensure we continue to protect small family farms with three-quarters of claims unaffected by these changes."

Economist Rupert Harrison warned: "If I had to pick one tax change that will unravel it's the £1million limit to agricultural property relief in IHT.

"Most small family farms are worth more than that, not that the farmers want to sell them, but they will now be unable to pass the farm on."