UK Tax Rule Gives Wealthy Way to Avoid Inheritance Tax, IFS Says

December 15, 2022

The UK tax system allows people to use their pension pots to avoid inheritance tax and should be changed to allow the government to collect more tax, a think tank has said.

Pensions are increasingly being used as a vehicle for bequests because if an individual dies before 75, any funds remaining in their pension escape income tax and pension pots at any age are not subject to inheritance tax, the Institute for Fiscal Studies said in a report Thursday.

The rule is encouraging some rich Brits to use non-pension assets to fund their retirement while preserving their pensions for bequests.

While the IFS said few of those dying today are bequeathing pension pots, it calculates that subjecting pensions to inheritance tax would eventually raise as much as £1.9 billion ($2.4 billion) a year. That could be used to cut other taxes or ease the planned squeeze on public spending, the IFS said.

It recommended that reforms to the “bizarre situation” are announced “as swiftly as is practical.”

[Bloomberg]