Families of dead Armed Forces personnel could face inheritance tax bill

Changes in the Budget could result in bereaved families of off-duty Armed Forces members being hit by inheritance tax on payments made to them, it has been claimed. Campaigners are now calling for the Chancellor Rachel Reeves to exempt death in service payments from the implications of the Budget change, which could see tax charged at 40 percent.

Death in service payments are typically a lump sum given to the named beneficiaries of an employee who dies while employed by a company, usually amounting to four times the deceased individual’s salary. For Armed Forces members, these payments have been made regardless of whether the individual was "on duty" at the time of their death.

However, under the new inheritance tax rules, a military worker who dies while technically "off duty" but still serving could be affected. The Forces Pension Society, an independent, not-for-profit organisation funded by membership, told The Telegraph it is examining the issue and plans to formally respond to the government consultation arguing that any death in service lump sum should be free from inheritance tax.

Some schemes may avoid inheritance tax as they make payments via a group life insurance policy held in trusts. Yet others that disburse funds as a pension lump sum will be taxable.

Sir Steve Webb, a partner at LCP and former pensions minister, urged the Government to seriously consider exempting death in service payments from future pension tax charges. He stated: "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." He added: "The new rules will also create extra red tape for grieving families and are highly likely to delay payouts."

Tax specialist Mike Warburton also cautioned that the implications of the new legislation could turn into a complete "dog’s dinner". A Treasury spokesman stated: "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."

He added: "Any pension funds left to a spouse or civil partner in this scenario will also be exempt."