Armed Forces death in service payments subject to inheritance tax from 2027

Grieving families of military personnel could face a shock inheritance tax bill. Death in service payments to members of the Armed Forces who die off-duty will be caught by Rachel Reeves’s inheritance tax raid from 2027, The Telegraph understands.

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 are 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. But a military worker who dies while technically “off duty” but still serving will be stung by the new inheritance tax rules.

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Steve Webb, partner at pension consultants LCP, said that the Labour Party government should “think very hard” about excluding death in service payments from the pensions tax raid. Mr Webb 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.” 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.”