The Government’s Inheritance Tax Giveaway To Society’s Richest
Was inheritance tax mentioned in the budget? Barely. But a look beneath the surface shows that the removal of a key pension threshold will enable the richest in society to, once again, escape the reaches of what many consider to be the most punitive of our scant wealth taxes.
Before going into the policy itself, we must first consider how pensions work. A pension is a pot of money, usually a set of investments. One pays into them, like any other investment, before eventually reaping the rewards, like any other investment. However, one aspect (among many) that sets them apart from standard investments is what happens upon death when the pension pot has not been fully depleted
The key here is that, in this scenario, what is left of the pension pot is then held on trust by the asset holder and the potential beneficiaries are the deceased’s spouse, children or whoever the deceased may have nominated in their lifetime.
At that point, as the pension pot is held on trust by the asset holder, and not held by the deceased, it will not form part of the deceased’s estate. If it does not form part of their estate then it will not be liable to inheritance tax.
So let’s go back to the policy in the budget. Previously, one could build up a pension pot of £1.07m before incurring income tax of 55% on income generated. The government has removed this £1.07m threshold. Not only does this mean that income tax will not apply, but it also turns the pension pot into an even more effective inheritance tax saving vehicle. Removing the income tax disincentive will incentivise high earners to top up their pension pot with as much funds as possible, in the knowledge that upon their death these funds will escape inheritance tax.
Crucially, this will only affect the few richest in society who can afford to plough in huge sums to an already hefty pension pot.
The government states that the reason for this measure is to ensure more NHS consultants stay in work, although the Office for Budget Responsibility suggest that only 15,000 people will be encouraged to stay in their jobs.
It is also interesting to note that although this measure is aimed at NHS consultants, it is not limited to them. Anyone with a large pension pot will benefit.
When most people think of pensions, they most likely consider them to be vehicles to provide steady income to those in old age. They do not think of them as clever schemes to avoid inheritance tax. Perhaps this month’s budget will start to make people think otherwise.