15/12/22

UK: Wealthy families use pensions loopholes to avoid £1bn in inheritance tax, says IFS.

As published on telegraph.co.uk, Thursday 15 December, 2022.

Rishi Sunak has been urged to launch a £1bn raid on inheritances as wealthy families increasingly use pensions to avoid the tax.

The Institute for Fiscal Studies said pensions risk becoming “a vehicle for the wealthiest households” to slash their inheritance tax bill as they use other investments to provide income in retirement.

The think tank said a rich couple can escape tax bills of more than £600,000 through the pensions loophole, urging for it to be “swiftly ended”.

Any money remaining in a pension at death at any age is not subject to inheritance tax, creating a huge incentive to use other investments to fund retirement and leaving pension pots for families. There is income tax on money received from inherited pension pots but only if they died at or after 75.

Mubin Haq, chief executive of Abrdn’s Financial Fairness Trust, said the wealthy are “increasingly being urged to use their pension pots as a way to pass on inheritance” by advisors.

“Whilst this avoidance measure is open to all, it is the wealthiest in society who are set to benefit the most,” he said.

The IFS said the solution would be to include pension pots in the value of estates for inheritance tax and ending the income tax exemption for those who die before 75.

It said that closing the loopholes could in the longer term generate £0.9bn a year in extra tax revenue if those benefiting were to leave half of their pension pots intact at death. It would raise £1.9bn if pension pots were to die with full pension pots.

It said that the revenue could be used to cut the overall rate of inheritance tax from 40pc to 35pc if £0.9bn was raised and 30pc if £1.9bn was generated.

Isaac Delestre, an economist at the IFS, said: “The situation where the tax system treats pensions more generously as a vehicle for bequests than it does as a retirement income vehicle needs to be swiftly ended.

“With the amount of wealth held in defined contribution pensions increasing year-on-year the unfairness and inefficiency this bizarre tax treatment creates will only get worse.”

The Treasury said it keeps all taxes under review.