An Inheritance Tax hike under Labour is a real possibility for pensioners - Nigel Green

Some experts suggest that Sir Keir Starmer's Labour Party might introduce IHT on pension pots, potentially subjecting them to the 40 per cent IHT rate. Such a move would mark a significant change in how retirement savings are handled and transferred.

Currently, many individuals use their pension funds to ensure financial security for their dependents in the future. The exemption from IHT on these funds enables a larger transfer of wealth to the next generation.

Yet if Labour extends IHT to include pension pots, it would compel many individuals to reconsider and reorganise their retirement plans.

Consequently, alternative strategies, such as relying more on trusts or increasing accelerated lifetime gifting, may become essential to reduce tax obligations.

The uncertainty about Labour's potential policy change could prompt pre-emptive measures to protect assets. One probable scenario involves individuals withdrawing funds from their pension accounts before any new legislation is introduced. These withdrawals could result in the relocation of wealth into other vehicles that offer more beneficial tax treatments.

In recent years, IHT has become a more profitable source of revenue for the UK government. Indeed, increasing property values and frozen tax allowances have pushed a larger number of families into the 40 per cent IHT bracket. This trend highlights the critical importance of effective estate planning to reduce tax liabilities.

In addition, last month, it was reported that some of the UK’s super-rich may leave the country if Labour wins the election and implements plans to scrap tax protections on offshore wealth they wish to pass on to future generations.

Approximately 70,000 individuals residing in Britain but paying minimal or no UK tax on their overseas earnings were already expecting higher tax bills, as the Conservative government announced in March its intention to gradually eliminate this “non-dom” status.

Indeed, in proposals released in April, Labour outlined plans to accelerate the removal of relief on foreign-earned income and broaden Britain's inheritance tax rules to encompass foreign assets held in trusts aimed at minimising such taxes.

Although Labour has pledged not to raise income tax, national insurance, and VAT, three significant taxes, it has also put forth ambitious plans to tackle issues like homelessness, higher education funding, adult social care, and local government finances, all of which necessitate substantial funding.

The funding needs for Labour's ambitious plans will have to be sourced from somewhere, and it is anticipated that an increase in Capital Gains Tax (CGT) will be a key target to help fill this financial gap.

As such, I believe that Labour's expected electoral victory and the necessity to finance their wide-ranging policy agenda make an increase in CGT a genuine possibility. In addition, Labour's proposed extension of Inheritance Tax to pension pots would likely boost government revenue.

Nigel Green is CEO and founder of the deVere Group.