How Labour's £2bn pensions tax swoop could DOUBLE your inheritance tax bill

Plenty in the Labour Party would love Reeves to launch an attack on inherited wealth, and now an influential think tank has joined the chorus of voices urging her to act. Worryingly, unlike many of the new taxes that Labour is considering, there will be little people can do to avoid it.

Which may also appeal to Reeves.

This one is squarely aimed at pensioners, and their families.

Currently, people can pass on any unused pension to loved ones after they die, entirely free of IHT.

This applies to company and personal defined contribution schemes, where money is invested in the stock market.

It does not apply to final salary company pensions, often called defined benefit schemes.

Many better off pensioners have therefore chosen to spend other retirement savings that are subject to IHT, such as Isas.

They leave their pension to last, hoping to pass it on free of IHT.

Now that tax planning opportunity could be obliterated in the upcoming autumn Budget.

That's exactly what the Institute for Fiscal Studies (IFS) is urging her to do.

Its economist David Sturrock has called the tax break “perverse”. Pensions are designed to fund people’s retirement and he thinks it's wrong to use them as an IHT planning tool.

Charging IHT on pensions would only bring in £200million in the first year, but the figure would grow over time.

Ultimately, the bill could hit £2billion, he reckons, as the amount of money held in defined contribution schemes grows following the decline of final salary schemes.

Which, ironically, were destroyed by the stealth tax raid unleashed by former Labour chancellor Gordon Brown in 1997.

In fact, many pensions are currently taxed on death. If the pension policyholder dies age 75 or older – well below average life expectancy – their beneficiaries must pay income tax on the money they withdraw.

Today, basic rate taxpayers pay 20 percent income tax on inherited pension. The charge could DOUBLE to 40 percent if they have to pay inheritance tax instead.

I'm assuming they won't have to pay both income tax AND inheritance – although you never know.

Charging IHT on pensions would have an even bigger impact if the policyholder dies before age 75.

Currently, unused pension savings can be passed on entirely free of tax. If Reeves acts on IFS demands, it could be liable to tax at 40 percent, if the total value of the deceased's estate passes the £325,000 nil-rate IHT threshold.

Previously, the family would have paid nothing at all.

This is going to be a great cash cow for a chancellor who is desperate to raise funds to spend on public services.

It would also dovetail nicely with her newly appointed adviser Sir Edward Troup's philosophy that "the best time to tax people is when they're dead".

An IHT pensions tax raid will please many in her own party, where a "bash the rich" mentality is taking hold.

It would infuriate many taxpayers, though, who see inheritance tax as a "death tax" that targets wealth that has already been subject to tax at least once.

We will find out more in the upcoming Budget, held at some point between September and November.

Unfortunately, it isn't the only pensions tax hike we have to worry about.

Some fear Reeves could also axe the 25 percent pension tax-free lump sum, which would be an absolutely huge change and incite fury among savers.

Personally, I don't think she's daft enough to do that, but I don't know.

Or she could cut higher rate tax relief on pension contributions, which could raised tens of billions. This would also prove unpopular, but only hit the better off.

Tensions will grow as the first Labour Budget looms.

Reeves is desperate to raise cash and needs little encouragement from the IFS, but she's been given it anyway.

As Labour's pensions tax raid looms – here are five things you can do to protect your retirement savings.