Labour MPs have voted to impose inheritance tax on death-in-service payments for military families for the first time, as part of changes backed by Rachel Reeves.
The new rules will force children and unmarried partners of deceased service personnel to pay death duties on the benefit from April 2027.
Death-in-service payments, which are currently tax-free lump sums given to families of deceased Armed Forces members, will now go into probate if not left to a spouse or civil partner.
The payments typically amount to four times the late individual's salary and are paid whether the service member was on or off duty at the time of death.
Under the changes, military personnel who die while "off duty" - such as from sudden illness or accident - will see their death-in-service payments subject to inheritance tax. Those who die "on duty" will continue to benefit from separate tax-free arrangements.
The new rules mean that payments intended as compensation for families could be reduced by up to 40 per cent in inheritance tax.
Military servicemen and women cannot avoid this tax by putting the payment into trust, as they are part of the Armed Forces pension scheme.
The head of the Forces Pension Society, which represents more than 66,000 members, has written to HMRC urging the Government to reverse the decision.
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Major General Neil Marshall, chief executive of the Forces Pension Society, warned that the rule change would be "corrosive" and undermine trust among Armed Forces personnel towards the Government.
"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 told The Telegraph.
In a letter to HMRC, Major General Marshall expressed serious concerns about the policy's impact on military effectiveness.
"Given the high-risk nature of military service... 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," he wrote.
Shadow Armed Forces Minister Mark Francois also criticised Labour's inheritance tax changes as "deeply regrettable" and against the spirit of the Armed Forces Covenant.
The spokesman from the Treasury confirmed that existing inheritance tax exemptions would continue for those who die from wounds, accidents or diseases contracted on active service.
A 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."
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The new rules will force children and unmarried partners of deceased service personnel to pay death duties on the benefit from April 2027.
Death-in-service payments, which are currently tax-free lump sums given to families of deceased Armed Forces members, will now go into probate if not left to a spouse or civil partner.
The payments typically amount to four times the late individual's salary and are paid whether the service member was on or off duty at the time of death.
Under the changes, military personnel who die while "off duty" - such as from sudden illness or accident - will see their death-in-service payments subject to inheritance tax. Those who die "on duty" will continue to benefit from separate tax-free arrangements.
The new rules mean that payments intended as compensation for families could be reduced by up to 40 per cent in inheritance tax.
Military servicemen and women cannot avoid this tax by putting the payment into trust, as they are part of the Armed Forces pension scheme.
The head of the Forces Pension Society, which represents more than 66,000 members, has written to HMRC urging the Government to reverse the decision.
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Major General Neil Marshall, chief executive of the Forces Pension Society, warned that the rule change would be "corrosive" and undermine trust among Armed Forces personnel towards the Government.
"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 told The Telegraph.
In a letter to HMRC, Major General Marshall expressed serious concerns about the policy's impact on military effectiveness.
"Given the high-risk nature of military service... 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," he wrote.
Shadow Armed Forces Minister Mark Francois also criticised Labour's inheritance tax changes as "deeply regrettable" and against the spirit of the Armed Forces Covenant.
The spokesman from the Treasury confirmed that existing inheritance tax exemptions would continue for those who die from wounds, accidents or diseases contracted on active service.
A 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."
Find Out More...