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Payments made to the bereaved families of members of the Armed Forces who die off-duty could be caught by inheritance tax due to changes in the Budget, it is claimed.
The revelation has triggered demands from campaigners for the Chancellor Rachel Reeves to make death in service payments exempt from the Budget change, which could see tax charged at 40 percent.
Death in service payments are usually a lump sum paid to named beneficiaries of a worker who dies while on the company payroll. It is typically the equivalent of four times the late individual’s salary.
For members of the Armed Forces, these have been paid whether or not the individual was “on duty” at the time of their death. Those who die “on duty” will continue to benefit from a separate tax-free arrangement on their death in service payments.
However, a military worker who dies while technically “off duty” but still serving will be stung by the new inheritance tax rules.
The changes will apply to service personnel who are unmarried or not in a civil partnership. For example, the children of a widowed soldier who dies off-duty would be charged up to 40 percent on their death in service payouts.
The Forces Pension Society, an independent, not-for-profit, membership-funded organisation, told The Telegraph it is looking at the issue. The body plans to formally respond to the government consultation arguing that any death in service lump sum should be inheritance tax-free.
Whether or not a death in service lump sum will fall under the scope of inheritance tax once the changes come into place depends on how the payout is administered.
Some schemes make death in service payments from a group life insurance policy held in trusts and therefore not within the scope of inheritance tax on that basis. However, other schemes make death in service payments as a pension lump sum payment, which will be in scope of the tax.
Sir Steve Webb, partner at pension consultants LCP who is a former Lib-Dem MP and pensions minister, said that the Government should “think very hard” about excluding death in service payments from the pensions tax raid.
He added: “When we hear about inheritance tax being applied to pensions, most people would be shocked to learn that this could include death in service lump sums, payable when someone in the Armed Forces or the uniformed services dies prematurely. This money is meant to provide compensation for their family and could now be cut by up to 40pc.
“The new rules will also create extra red tape for grieving families and are highly likely to delay payouts.”
Tax expert, Mike Warburton, warned that the new rules could become a complete “dog’s dinner”.
A Treasury spokesman said: “We value the immense sacrifice made by our brave Armed Forces. That is why existing inheritance tax exemptions will continue to apply, meaning that if a member of the Armed Forces dies from a wound inflicted, accident occurring or disease contracted on active service, they will be exempt.
“Any pension funds left to a spouse or civil partner in this scenario will also be exempt.”