Rachel Reeves faces calls to launch inheritance tax raid on pension pots in bid to raise extra £2 billion a year

17 July 2024, 06:07 | Updated: 17 July 2024, 08:17

Rachel Reeves is facing calls to launch an inheritance tax raid on pension pots in a bid to raise an extra £2 billion a year.

Economists have suggested the Chancellor introduce a death tax on unspent cash in defined contribution funds.

The move would align with recommendations from the International Monetary Fund (IMF) in a report on the UK.

It comes after an IMF update on Tuesday said the government needed to stick to commitments to balance the books - but high interest rates were making it harder to progress.

Labour has vowed to continue with the previous government's targets on bringing down debt.

But both Labour and the Conservatives faced criticism during the campaign trail for not being realistic about the difficult decisions they would need to make to help the economy.

The IMF previously suggested the government consider "broadening the base of VAT and inheritance tax, while reforming capital gains and property taxation" - a move that could include "removing unnecessary reliefs" for inheritance tax.

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David Sturrock, an economist at the IFS, told the Telegraph: “The current system gives an incentive to hold onto pension wealth and use other assets to fund retirement.

“This leads to the rather perverse situation where pensions are used as a vehicle for inheritances rather than to fund retirement.

“In terms of the inheritance tax revenues that would be gained from bringing pension pots into inheritance tax, the impacts now would be modest.

“We estimate around £200m extra could be raised now. But the importance of this special treatment is set to grow quickly because more and more people will arrive at retirement with wealth in DC pension pots over time and the sums involved will be larger.

“In the coming decade or so, we estimate that the revenues raised by bringing pension pots into the scope of IHT would be in the range of £1bn to £2bn.”

However there are concerns that the move could result in some facing double taxation.

As it currently stands, if a pension pot owner below the age of 75 dies, money can be withdrawn without being subject to inheritance tax or income tax.

For those that die after the age of 75, withdrawals are taxed as income - potentially leading to the double tax.

It comes after Ms Reeves said that she recognised the "scale of the challenge" facing the economy.

Any tax changes set to be introduced with not be announced until the Budget in autumn.

A Treasury spokesman said: “We have set out the need to deliver economic stability, so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”