In Labour’s first budget announcement in over a decade, Chancellor Rachel Reeves outlined a series of tax reforms and economic policies aimed at tackling what she describes as the economic damage left by the Conservatives.
Reeves, who warned of “difficult decisions” ahead, has proposed measures targeting inheritance tax and capital gains tax (CGT). A focal point of Reeves’ budget is the extension of the inheritance tax threshold freeze. Reeves announced that this freeze will now be extended until 2030, effectively keeping these thresholds fixed for two additional years.
In addition to the threshold freeze, Reeves announced that inherited pensions will be included in inheritance tax calculations starting in April 2027. Similarly, she outlined reforms to Agricultural Property Relief and Business Property Relief. Under the new rules, the first £1 million of combined business and agricultural assets will remain exempt from inheritance tax, while assets valued over this threshold will be taxed with 50% relief, at an effective rate of 20%, beginning in April 2026. Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said:
“The generous treatment of pension death benefits has long been considered low hanging fruit for a government in search of cash. It’s a stance that has set it apart from other savings vehicles with the position where a death occurs pre age 75 particularly generous. It’s led to criticism that people were leaving their pensions untouched so they could be passed down the generations in a tax efficient manner rather than being used to provide an income in retirement.
Today that fruit has been plucked as pensions will now be made subject to inheritance tax. It’s a move that could prove complex and will need changes to trust law to make workable. A much easier solution would have been a return of the so-called “death tax” that existed pre-Freedom and Choice and it is important that the industry engages with government during the consultation process to make sure unnecessary complication is not introduced.
It’s a decision that will upturn many people’s plans as we will see many more people being dragged into paying inheritance tax because their DC pension is now counted as part of their estate. It’s an issue that will not be felt by those with defined benefit pensions as these cannot usually be passed on.”
Gary Smith, Financial Planning Partner and retirement specialist at wealth management firm Evelyn Partners, said that pensions have been “one of the most tax-efficient investments available to savers”. He continued:
“…with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death. That means some retirees have prioritised using other savings and assets to fund retirement before their pensions. Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%.
It’s arguable that this consolidates the two tiers of the UK pension system, as the change removes one of the few advantages that defined contribution pensions had over the gold-plated final salary schemes that now exist largely just in the public sector. DC pot holders could leave their savings to beneficiaries tax-efficiently, while the death benefits for members of public sector or defined benefit pension arrangements vary between schemes, but usually entail an income paid to dependents.
There seems to be a willingness in Whitehall to allow the gap between private and public sector pension arrangements to widen.”
Reeves also introduced hikes to capital gains tax. Starting next April, the lower CGT rate will rise from 10% to 18%, while the higher rate will increase from 20% to 24%. The CGT on residential property, a separate rate, will remain at 18% and 24%, respectively. Additional reforms to CGT are set to roll out in April 2026.
In total, Reeves’ budget introduces £40 billion in tax increases. Reflecting a focus on social welfare, Reeves confirmed that Labour would not increase National Insurance, VAT, or income taxes for working people. She also announced a commitment to maintaining the pension triple lock. Spending on pensions is projected to rise by 4.1% in the 2025-26 fiscal year, equating to an approximate £470 increase for over 12 million pensioners.
Reeves also announced the abolition of the non-dom tax regime, which currently allows UK residents who are domiciled abroad to avoid certain taxes on overseas income. In its place, she will introduce a residence-based scheme designed to retain competitive tax conditions for temporary residents. Rahul Kotecha, Private Client Services Director at law firm Freeths, said:
“Many more Estates will now be subject to inheritance tax (IHT) with the thresholds including the residential allowance, remaining the same. With no decision to remove the unfair residential allowance, individuals who do not own properties and/or have children will not benefit from an additional inheritance allowance. By including pensions within an Estate for IHT purposes, this will lead to withdrawals prior to the change and increases in lifetime gifting
These changes will mean there are likely to be more disposals as Business Asset Disposal Relief is capped. The Capital Gains Tax increase was a middle ground so that there are still likely to be disposals. As a result, more individuals will have estates that are subject to IHT as inflation rises as the rates remain the same.”
Colin Clarke, Head of Product Policy Strategy at Legal & General said:
“The Budget has been long awaited and has seen many significant changes. It’s encouraging therefore that many of the incentives associated with savings and investments have been maintained, demonstrating the Government’s commitment to creating a stable and consistent policy environment for long-term saving. However, the taxation of inherited pensions, as announced in the Chancellor’s statement, will bring more people into the scope of IHT and change how pensions are used for estate planning. This will need to be managed carefully so that savers can make the right decisions and understand the value of pensions as a long-term investment.
At Legal & General, we’ve welcomed the Government’s pensions review which we hope will help tackle the ongoing challenge of pension adequacy and consider savers’ long- and short-term needs. This could include a roadmap to increase minimum workplace pension contributions, the abolishment of the lower qualifying earnings band to help make it easier to save and the lowering of the minimum auto enrolment age to 18.”
Jade Gani, Director at The Association of Lifetime Lawyers, and Founder at Circe Law, said:
“With the latest policy announcements, there’s a lot to consider, but pensions are a big concern. The recent decision to make inherited pensions taxable under IHT adds complexity and raises serious questions about whether it’s still worth investing in pension pots over other options. Clarifying who bears this tax liability—whether it falls to pension or estate beneficiaries—will be essential for informed estate planning. The claim that only 6% of estates are currently taxable might hold now, but adding pensions into the taxable estate category is bound to shift that number upward.
On non-dom taxation, the abolition of the existing regime in favour of a residence-based scheme represents a significant shift. This change will require careful navigation as affected individuals and families transition into the new system. We advise individuals and families to seek professional guidance to navigate these complexities, ensuring that personal and financial plans are aligned with evolving tax obligations.”
