Everyone is panicking about what Rachel Reeves is set to do in her second Budget on November 26. Judging by what she did last time, they’re right to be afraid. Reeves is now preparing to take the previously unthinkable step of hiking income tax for the first time in 50 years. She’s also coming after our Cash ISAs, pensions, homes and inheritances in a brutal multi-pronged assault.
This won’t be her first assault on our inheritances. She made a grab for them in last year’s Budget too, by slapping inheritance tax (IHT) on unused defined contribution pension pots, the type invested in the stock market.
These were previously exempt from IHT, although beneficiaries already paid income tax on withdrawals if the policyholder died from age 75.
That’s not enough for Reeves. From 2027, she’ll force families to pay IHT first, then income tax on top. Bereaved families will face combined rates of up to 67%. That’s so greedy, even by her rotten standards.
This will happen in 18 months, but most people haven’t woken up to the threat. One woman has though.
Ros Altmann, former pensions minister and later life campaigner, is sounding the alarm. She calls the Chancellor’s plan “ridiculous and impossible” adding: “We’re sleepwalking into disaster.”
Thanks to Reeves, bereaved relatives will be expected to navigate one of the most complex tax traps ever devised. When a loved one dies, grieving relatives will have to find every pension the deceased ever had, identify the beneficiaries, calculate the IHT bill and hand over the money. All within six months.
It just can’t be done. Pension administrators aren’t notified about deaths for weeks or months. They then need time to verify identities, confirm benefits and value pension pots.
It’s a bureaucratic nightmare, Altmann says. “Expecting widows and orphans being expected to manage this pension stuff is just madness.”
None of this matters to HMRC. The clock starts ticking anyway.
Worse, probate cannot be granted until all this work is done, but families must still pay up in six months. If they can’t, HMRC will charge 8% interest.
Altmann spells it out: “The Government doesn’t allow them the money to pay the tax, then charges a penal interest rate for not paying.”
She says Reeves could “kill off modern pensions” by making them so complicated and risky that millions are deterred from saving.
Treasury claims that only a minority of estates will be affected are nonsense as families will have to double check what pensions loved ones had, Altmann says.
Failure to identify a scheme could leave the executor personally liable for unpaid tax. “That’s a terrifying prospect for someone acting out of kindness and unpaid.”
Others share her concern. Fiona Mainwaring, head of wills and probate at ORJ, fears the probate system will buckle. Tom Selby at AJ Bell says pension saving relies on trust and that tearing up the deal halfway through destroys confidence.
Pensions are already taxed once on death. Under Reeves, families will pay twice, and the admin will be hellish. She needs to wake up to the damage, but that looks unlikely.
The full scale of the tax disaster won’t be clear until grieving, bewildered families get a demand from HMRC. To pay tax on money they don’t even have.
