While the inheritance tax changes for farmers have grabbed most of the media attention, it is the IHT changes relating to pensions which will affect far more people and raise far more money.
Indeed, I think that the government has substantially under-estimated the revenue they are likely to generate through this policy.
Under the Budget plans, from 2027-28 onwards, the value of ‘unspent’ defined contribution pension pots will be included in the assessment of estates for IHT purposes, as well as certain other pension-related lump sums.
The reason for the delay is that HMRC plans to make inheritance tax ‘digital’, so that this whole process can be made more efficient, and that is not currently possible.
As a result, the official government estimate of the revenue from the change is just £640m in 2027/28, rising to £1,340m in 2028/29 and £1,460m the following year.
The low first year figure arises simply because it is only deaths which occur from 6 April 2027 which will be in scope and the IHT in respect of those deaths may not reach the Treasury for many months afterwards.
The newspapers are full of people who have reacted by taking money out of their pensions much earlier than planned
The Treasury documents show zero ‘exchequer impact’ for this policy for both 2025/26 and 2026/27.
But this seems to me to be a significant understatement.
As any adviser will tell you, there are plenty of people who are aware of these changes and are already revisiting their plans. The newspapers are full of people who have reacted by taking money out of their pensions much earlier than planned and are now spending it on multi-generational family holidays or even the famous sports car.
But if this starts to happen at scale, then the Treasury could be in for a windfall. Every time someone takes money out of the tax-privileged pensions ‘wrapper’ with a view to spending it, there is likely to be a chunky income tax bill to be paid. And if they then spend the money on luxury items, there’s a pretty good chance that they will also be chipping in to the VAT tax take as well.
Some people may feel that by acting in this way they can thwart the tax office by making sure that no IHT is payable on this money.
But, if you were the chancellor, you would be rubbing your hands with glee. Instead of money sitting in pension pots and eventually passing on free of IHT on death in years to come, the Treasury is now getting a flow of tax revenues right away.
Farmers with tractors in Parliament Square are an eye-catching way of drawing attention to one IHT change
Just at a time when we are constantly reading of the chancellor’s limited fiscal ‘headroom’, I have no doubt that income tax and VAT revenues will surprise on the upside in the next few years because of this behaviour.
It also seems likely to me that this policy will yield huge sums in the medium term, even if people do not take action to minimise their liability.
Until now, the pension assets of most people on death have been in DB pensions alongside relatively modest defined contribution pots.
But as well as the steady growth in the size of DC assets, there was also the ‘gold-rush’ of DB to DC transfers in the post 2015 era.
Over that period many tens of billions of pounds were transferred out of DB pensions where no IHT would fall due on death to DC where the full unspent balance could now be taxed.
Given that the desire to pass on a cash inheritance was one of the reasons why some people chose to transfer out of their DB scheme, it would be an irony if they now find that those transferred balances are subject to IHT at 40%, plus any income tax payable by recipients in the event of a death over the age of 75, bequeathed to someone other than a spouse.
The DB transfer ‘generation’ were typically in their late 50s or early 60s when they transferred in the late 2010s, so hopefully they had a good few years ahead of them when they did so.
But as this group gradually dies (and their widows/widowers also die), the impact of the pensions IHT change could grow significantly.
There is no doubt that farmers with tractors in Parliament Square are an eye-catching way of drawing attention to one IHT change in the Autumn 2024 Budget.
But it will be another IHT change in the same Budget which will ultimately raise far more money for the government.
Steve Webb is a partner at pension consultants LCP, and was UK pensions minister from 2010 to 2015
