Labour to change Inheritance Tax for pensions that could cost you £214,000: "The biggest overnight tax hit on the most people in decades"

LABOUR'S proposed changes to the Inheritance Tax treatment of pensions has been described by financial experts as “arguably the biggest overnight tax hit on the most people in decades".

Under the plans, pensions — currently exempt from Inheritance Tax (IHT)— could be included in people’s estates from April 2027, potentially creating huge new tax bills for millions of savers.

Financial adviser Scott Gallacher, director of Rowley Turton, has launched a free IHT Calculator to help people and advisers estimate how these proposed changes could affect them.

He said: “In my own case, the proposed change would mean an overnight tax hit of around £214,000 should I predecease my partner. 

"Looking across our client base, the combined impact could exceed £40 million in additional Inheritance Tax without proactive planning.”

He added: “Have we ever seen a single tax change that could have such a dramatic and immediate impact on so many ordinary families?”

Luke James, Tax Director at Gravitate Accounting, agreed that the tax hike would be huge.

He added: "This could be the biggest overnight tax hit on the widest group of people in decades. While intended to target high-net-worth individuals using pensions to pass on wealth tax-efficiently, it will also catch many ordinary savers who never sought to avoid tax. 

"Hardworking people who built solid pension pots to fund retirement but passed away before drawing them. Think of unmarried couples in their 50s or 60s, not yet accessing pensions, whose estates now face a sudden and significant bill. Their pensions weren’t tax dodges — just sensible planning. 

“This change risks punishing prudence and could have far-reaching consequences for families. What’s most concerning is that few clients realise the implications. Our scenarios show that combined IHT and tapering restrictions could push marginal rates above 60%, a staggering result for families who thought they were doing everything right. Without proactive inheritance planning, many could be blindsided by a seismic shift in pension taxation.”

Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said the government is going under the radar in the tax hike.

He continued: "This pension IHT change is a political masterstroke. The delay to 2027 is necessary for the systems to be updated, but it also benefits the government by allowing the public outcry to fade until the tax is an established revenue stream. 

“Once the money is rolling in, repeal is highly unlikely. The fundamental flaw, however, is the signal it sends to savers: that the government will penalise your family for building the fund needed for a comfortable retirement. This tax doesn't incentivise saving; it risks putting people off, which will lead to poorer retirements and ultimately, greater reliance on the state.”

Dariusz Karpowicz, Director at Doncaster-based Albion Financial Advice, said many don't know about the hikes.

He added: "Your pension pot faces a 40% tax grab from 2027. That retirement fund you've built over decades could leave your family with a six-figure inheritance tax bill they never expected. Politicians have found their next revenue stream, and it's your savings. 

“Unmarried couples get hit hardest with no spousal protection, whilst some estates could see rates above 60%. The 2027 delay lets public anger fade before the cash starts flowing. You can't predict the next tax raid, but you can act now. Review your pension nominations, check trust options, and calculate your potential bill using free online tools. Once this tax becomes normal, reversal looks unlikely.”