Labour MPs have voted to hit grieving families of military personnel with inheritance tax for the first time as part of Rachel Reeves’ raid.
Death in service payments – lump sums given to the families of deceased Armed Forces members – are currently tax-free.
But changes backed by Labour mean that the payment for off-duty deaths in service will be subject to inheritance tax for the first time, if it is not going to a spouse or civil partner.
It means that children or partners of unmarried servicemen and women will from April 2027 have to pay death duties on the benefit, which will now go into probate.
The head of the Forces Pension Society warned that the rule change would be “corrosive” and undermine the trust among Armed Forces personnel towards the Government.
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”, such as by sudden illness or accident, will be stung by the new inheritance tax rules, as a result of changes unveiled in the Budget last year.
Maj Gen Neil Marshall, the chief executive of the Forces Pension Society of more than 66,000 members, has written to HM Revenue and Customs (HMRC) urging the Government to reverse the decision.
He told The Telegraph: “If service people are thinking ‘What if? What if? What’s the Government going to do next to undermine the offer to undermine my commitment to service?’ It’s corrosive.”
He added that military servicemen and women are unable to put the payment into trust, because they are part of the Armed Forces pension scheme, so will be forced to pay the tax.
This means that money designed to be a form of compensation for families could be cut by up to 40 per cent.
In a letter to HMRC, seen by The Telegraph, Maj Gen Marshall said: “Given the high-risk nature of military service and the need for all serving personnel to be focussed on the mission while being treated fairly and equally, irrespective of their marital status, a policy that discriminates against those who are not married or in a civil partnership poses a serious threat to morale, team cohesion and ultimately operational effectiveness.”
Mark Francois, the shadow Armed Forces minister, said: “Labour’s proposed inheritance tax changes are already highly controversial, particularly within the farming community.
“However, it is deeply regrettable and completely against the spirit of the Armed Forces Covenant that Labour MPs voted to impose inheritance tax on death in service lump sum payments for unmarried service personnel.
“The Forces Pension Society, who are the gold-standard experts on this topic, have called for this change to be reversed, which it undoubtedly should be.”
A spokesman for the Treasury 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.”
