I have this morning published the next in my series of proposals that will make up the Taxing Wealth Report 2024.
In this latest note, I suggest that the inheritance tax exemption for funds that can be retained in a pension fund at the time of a person's death should be abolished. There is no logical reason why these funds should be capable of being passed to a person's heirs free of tax in some circumstances, most especially when they have already been accumulated tax free.
The summary of this report says:
This note suggests that:
- The current inheritance tax provisions that exempt from charge to that tax sums left in personal pension arrangements that have been undrawn at the time of a person’s death should be abolished.
- These arrangements have been abused with consequence for horizontal and vertical tax equity in the UK.
- This abuse is widely known about and advised upon by UK financial services providers.
- Despite forthcoming panned changes to pension tax laws, this arrangement is likely to offer continuing opportunity for abuse in the future.
- On the basis of reasonable estimates, abolishing this exemption could raise maybe £1.3 billion in additional tax revenue per annum.
- This change would be easy to implement.
There are some suggestions made within the Taxing Wealth Report 2024 that require quite a lot of explanation and justification. This suggestion is not one of them.
There is no inherent tax logic to a relief from inheritance tax that exempts from charge to that tax funds that have already been accumulated tax-free within a pension fund arrangement set up for the benefit of an individual person. If anything comes close to being described as a tax loophole, then this is it. Why it was created and with what intention does not really matter. What is known is that it is widely recommended and is likely to be widely used for precisely that reason. Even forthcoming changes in pension rules are not likely to eliminate all its appeal. This loophole has to be removed.
Cumulative value of recommendations made
The recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £95.0 billion per annum.