The relatives of deceased family members with unfunded company pension arrangements could be hit by this tax.

This is according to consultants Watson Wyatt, who say the tax would be measured on the value of the pensions.

Additionally, while the estate would have to pay the tax, the pension might die with the earner.

The Finance Bill currently removes the inheritance tax advantages of unapproved pension arrangements on the estates of executives.

According to Watson Wyatt, if the current provisions of the Finance Bill remain unchanged those with unfunded unapproved retirement benefit schemes could create an inheritance tax liability for their estate on the underlying value of their pension entitlement.

This would be the case even though neither the pension nor the underlying value of the pension could be transferred to their beneficiaries.

Sue Bartlett, a partner at Watson Wyatt said: “We are raising it with the Inland Revenue. Hitherto, a provision of the Inheritance Tax act 1984 would has excluded the value of the pension from the valuation of the estate for Inheritance tax purposes, but this provision is to be disapplied to unapproved schemes after April 2006.”

Ms Bartlett concluded by saying: “It would mean, for example, that the estate of an executive with an unfunded pension entitlement of £50,000 a year could suffer inheritance tax of about £400,000 – 40 per cent of an approximate £1 million underlying value of such a pension promise.”