With an increasing number of Brits staring down the barrel of inheritance tax responsibilities, many may not be aware they’ll face a staggering bill surpassing 70% rather than the usual 40% inheritance tax rate.

Rachel Reeves turned heads when she announced that certain pension pots would now be liable for inheritance tax in her Autumn Budget. Previously if an individual passed away before 75, it was possible to give away their entire pension pot tax-free.

Even those who died after the age of 75 only faced a tax bill on their pensions equal to the income tax bracket of the recipient, ranging from 20% to 45%, rather than the 40% inheritance tax rate.

However, with countless wealthy families using this loophole to feed generations of wealth, the Chancellor has now sealed it and potentially launched a double-tax hit on some Brits.

Alastair Black, Abrdn’s head of savings policy, weighed in during a chat with This Is Money and explained that this change doesn’t take away income tax burden on pension funds being inherited.

Black stated: “Adding inheritance on top of this could see the estate and the recipient paying tax twice between them on a proportion of the same pounds.”

Andrew Marr, managing partner at tax consultancy Forbes Dawson, illustrated an example of the impact of recent tax changes. He explained a scenario where an individual’s annual salary places them in the additional 45% income tax bracket and they inherit an estate from a deceased parent.

The estate includes a newly liable pension scheme, non-pension assets, and a residence, altogether exceeding the £325,000 threshold for inheritance tax. If the beneficiary decides to withdraw their entire inheritance, they would be subject to the 40% inheritance tax for estates over £325,000.

Additionally, another 45% would be deducted from the fund before they get hold of it in relation to their income tax bracket due to the pension tax change before it reaches the beneficiary.

Andrew emphasised: “It gets worse, however, because the pension scheme assets also have the effect of tapering £350,000 of residence nil rate band down to nothing. This is effectively equivalent to another £140,000 of inheritance tax on the pension scheme, meaning an effective tax rate of 70.5 per cent.”

Many people have traditionally used pension pots as a means to transfer wealth to their children with minimal tax implications, but this has drastically disrupted their family wealth planning.

Andrew further cautioned: “This shows how dangerous it is to engage in very long-term tax planning, because different governments mean that taxpayers can have limited faith in the long-term outcome.”