Rachel Reeves has been urged to scrap the “most hated tax'” on pensions as UK households face a raid. Pension savings are set to become liable for inheritance tax by April 2027 under a Labour Party shake-up.

O n the death of the business owner the inheritance tax bill will have to be settled by the pension scheme, not from the overall estate. So the pension scheme will have to find some way to get cash from the assets in the pension.

This could force a sale of premises or plants. Gary Smith, financial planning partner at Evelyn Partners, warned: “This could be a serious problem for thousands of small and medium-sized businesses, one that is currently flying under the radar, probably because it’s not widely understood.”

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Owners and directors who don’t take advice or make preparations could fall foul of the new IHT charge, with the end result in some cases that their businesses are liquidated and jobs lost,” Smith added.

He described a retired client who owns commercial property worth £1.2million in their pension, generating £100,000 annual rent from their business tenant.

“So what happens then? Will the pension scheme be able to borrow money to pay the tax bill, or will the business have to borrow money to buy the property, at high interest rates, and put cash in the pension scheme instead?” Smith asked.

Tom Selby, AJ Bell’s director of public policy, urged the Chancellor to reconsider, warning the proposals create “huge complexity” and could discourage pension saving altogether.

He said: ““IHT is often described as the most hated tax and this data backs that up. Proposals to subject unused pensions funds to IHT on death are the most widely opposed of all the tax raising measures announced so far.

“It’s not hard to see why individuals object to widening out the net of inheritance tax to catch pensions, perhaps resenting that their loved ones may be asked to pay tax twice on inherited pension funds – once through inheritance tax, and again via income tax.

“This potential double whammy of taxation will be seen as unfair by some, and could put off people saving in pensions in the first place or encourage others to run down pension pots, leaving themselves with little to live on in later years.”