Families could face ‘death taxes’ of almost 70 per cent after the Chancellor changed the rules around inheriting pension funds, experts have warned.

Yesterday, in her first Budget, Rachel Reeves announced that from 2027 the value of pensions will be included in inheritances.

This means thousands of grieving families will be forced to pay the dreaded 40 per cent death duty for the first time.

But experts have since expressed concern that some beneficiaries could be “hit twice” due to the interaction of inheritance tax and income tax.

Rachel McEleney, of accountancy firm Deloitte, said according to The Telegraph: “The removal of the inheritance tax exemption appears to have a dual impact on death benefits which do not qualify for an income tax exemption, such as those where people die at over 75 years of age. years.

Pensions will become subject to inheritance tax as part of a £2bn crackdown announced by Rachel Reeves in her explosive first Budget on Wednesday.

The Chancellor has also closed several IHT tax loopholes which benefit investors, family business owners and farmers.

“Assuming that the entire fund is subject to an inheritance tax of 40 percent and that the beneficiary pays income tax of 45 percent on the remainder, this appears to give rise to a rate of effective taxation of 67 percent on taxable death benefits.”

Family members pay income tax on pension withdrawals at their marginal rate, if a person dies after age 75.

Although that rate could be 20, 40 or 45 percent, experts have warned that basic rate taxpayers could be dragged into the higher bracket depending on how they withdraw their money.

Steven Cameron, of pensions firm Aegon, said if beneficiaries chose to withdraw the money as a lump sum rather than a rolling income, it could take them up a notch.

Annuity withdrawals are not subject to income tax if the owner dies before age 75.

Gareth Henty of PwC added: “Making defined contribution pension funds subject to inheritance tax will have significant implications for retirees and their financial planning.

“If retirees are unable to pass on their national contribution savings to their loved ones without incurring inheritance tax, this risks accelerating the early withdrawal of their savings, potentially leaving retirees with a much larger defined contribution pot. small – even empty – later in life, when I need them most.

“Alternatively, we could see an increase in the number of retirees now looking to secure a guaranteed income via an annuity.

“All these changes in behavior are likely to mean that the actual additional inheritance collected by the Treasury will fall significantly. Individuals will no longer be encouraged to pass on private sector pension wealth from one generation to the next.

British Prime Minister Keir Starmer speaks to reporters during a visit to the University Hospital of Coventry and Warwickshire October 31.

Ms Reeves defended her changes to the rules around inheriting pension funds, saying it made the inheritance tax system fairer.

But Mike Ambery, director of retirement savings at Standard Life, part of the Phoenix Group, said it would just mean savers will be more likely to withdraw money from their retirement savings sooner.

He added: “Pensions have been seen as a useful tool for estate planning and some individuals and families will have approached retirement and estate planning based on the existing rules.

“The end result of this change is that many more people will now be able to benefit from IHT.”

This is a record one in ten families expected to be hit with inheritance tax within five years of the Budget.

Last year, only 5% of deaths gave rise to inheritance tax, but the Institute for Fiscal Studies (IFS) said this figure would double in 2029.

Families can still pass on up to £325,000 after death, free of inheritance tax – known as the zero-rate band.

The Chancellor extended the freezing of the zero rate band by two years, at least until 2030. The threshold has been frozen since 2009.

The freeze is widely seen as a stealth tax, with increasing numbers of middle-class families being drawn into its net as the value of homes and assets rise while the threshold remains unchanged.

Ms Reeves also closed several inheritance tax loopholes that benefit investors, family business owners and farmers, making it harder to pass money on to the next generation.

This included reform of agricultural property relief and commercial property relief.

From April 2026, the first £1 million of combined business and agricultural assets will continue to be subject to no inheritance tax.

But for assets above £1m, the chancellor said inheritance tax would apply with 50 per cent relief at an effective rate of 20 per cent.

Ms Reeves said: “This will ensure we continue to protect small family farms, with three quarters of claims unaffected by these changes. »

Victoria Price, of tax consultancy Alvarez and Marsal Tax, said it was an explosive announcement for family businesses.

She explained: “Limiting business support to a maximum of £1 million could have disastrous consequences for some of the UK’s most historic businesses, potentially making it difficult for them to remain in family ownership. »