Removing inheritance tax (IHT) benefits from pensions could create a double tax hit for beneficiaries if the Chancellor, Rachel Reeves, decides to make this change in the upcoming Budget, Saltus has warned.

The wealth management firm noted that there was widespread speculation that the government is planning to increase the amount of money it raises through IHT in the Budget on 30 October.

It is rumoured that Reeves is considering several changes to the tax, which currently includes several exemptions and reliefs.

IHT is currently charged at 40 per cent on the property possessions and money of someone who has died, but only above the nil-band rate of £325,000, with Saltus stating that it was possible that Reeves could lower the threshold or remove it altogether, alongside potentially removing the current exemption on pensions.

“Pensions can currently be passed on IHT-free, but after age 75 they are only accessible at the recipient’s marginal tax rate – potentially 40 per cent or 45 per cent,” said Saltus partner, Jordan Gillies.

“So, the removal of IHT benefits from pensions could create a double tax hit for beneficiaries.

“Many high-net-worth individuals (HNWI) tap into their pension funds last to make the most of IHT advantages that currently accrue to pensions, but this change could upset that approach.

“The recent trend of increasing pension contributions following the scrapping of the lifetime allowance might reverse, pushing many towards options like nil rate band trusts instead.

“Although if the nil rate band is removed – which would feel like a stealth tax – families could be pushed to explore other options like insurance products for IHT planning. It would also likely drive-up gifting levels which could reduce Treasury revenue.”

Saltus also pointed to gifting as another area of IHT that could be reformed, with the Chancellor potentially considering extending or removing the seven-year rule or introducing a 10 per cent charge on larger lifetime gifts.

“If taper relief is removed or the seven-year rule is extended, IHT planning will need to start earlier, adding pressure on HNWIs,” Gillies stated.

“Moreover, introducing a 10 per cent charge on lifetime gifts over a £30,000 allowance would hit families hard, especially those trying to help children onto the housing ladder.

“With HNWIs already viewing IHT as the most unfair tax, according to the latest data from the Saltus Wealth Index this change would only add to that frustration.”

IHT is not the only tax that is reportedly in the Chancellor’s crosshairs, with capital gains tax (CGT) also a potential area of reform.

Saltus warned that changes to CGT could see some HNWIs leaving the UK to realise gains, with 15 per cent considering leaving the UK in the next 12 months.

Furthermore, the prospect of estates facing both CGT and IHT changes together would create double taxation at 40 per cent each, which could significantly reshape tax behaviour among the wealthy and result in serious implications for UK tax revenues and property markets, Saltus argued.

“Proposed changes to CGT, especially aligning it with income tax as recommended by the OTS and IFS, could have very significant consequences,” Gillies commented.

“With 11 per cent of HNWIs already viewing CGT as one of the least fair taxes, many are considering leaving the UK to realise gains. Our latest Saltus Wealth Index reveals that 15 per cent of HNWIs plan to leave the UK within the next 12 months.

“A further 18 per cent are considering it, and we have already had clients talking about temporarily moving to lower tax jurisdictions like Cyprus. Residency can be claimed here in just 30 days. This could also lead to a surge in the use of offshore bonds and venture capital trusts (VCT) to shelter gains.

“In property markets, a higher CGT rate on sales may lead to large-scale disposals before the next fiscal year, potentially inflating rental yields. 11 per cent of BTL property owners say they plan to sell all their properties, and we may also see HNWIs shift away from property and into tax efficient vehicles like offshore bonds or VCTs. Data from the Saltus Wealth Index shows that 37 per cent of HNWIs already invest in VCTs, and a further 46 per cent plan to.

“For estates, the possibility of a double whammy of CGT and inheritance tax – effectively two lots of taxation at 40 per cent each – could push many towards more aggressive tax planning, likely leading to increased use of shelters or even relocating wealth offshore. These changes could significantly reshape tax behaviour among the wealthy, with serious implications for UK tax revenues and property markets.”

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