TL;DR
The Autumn Budget 2025 introduced a spousal exemption that mirrors the existing inheritance tax exemption between married couples and civil partners. From 6 April 2027, when most unused pension funds enter the IHT net, pension assets left to a surviving spouse or civil partner will remain IHT-free. The exemption requires the surviving partner to be a long-term UK resident. The exemption does not apply when pensions are left to children or other beneficiaries.
The April 2027 reform of pension inheritance tax (IHT) is the most significant change to estate planning in over a decade. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person's estate for IHT purposes. In response to industry feedback during the 2025 consultation, the Autumn Budget 2025 introduced a spousal exemption that protects pension assets passing to a surviving spouse or civil partner.
The exemption mirrors the existing IHT exemption that has long protected transfers between married couples and civil partners on first death. Without this exemption, the April 2027 reform would have created a significant cliff edge for surviving spouses, particularly where the deceased held a defined contribution pension as the largest asset in the estate.
What the exemption covers
The spousal exemption applies to pension assets, including unused defined contribution funds and most pension death benefits, that pass to a surviving spouse or civil partner on the member's death. Where the exemption applies, those assets are excluded from the value of the deceased's estate for IHT purposes, and no 40% IHT charge arises on those assets at first death.
The same exemption applies to gifts to UK-registered charities. Pension funds left to a registered charity on death will remain IHT-free, and the existing 10% test, which reduces the IHT rate from 40% to 36% on the rest of the estate where at least 10% is left to charity, continues to apply.
Who qualifies as a spouse or civil partner
The exemption applies to a person legally married to or in a civil partnership with the deceased at the date of death. Cohabiting partners, regardless of how long they have lived together or whether they have children, do not qualify for the spousal exemption. This is consistent with the existing IHT regime, which has long treated cohabiting partners differently from spouses for inheritance tax purposes.
The surviving spouse or civil partner must be a long-term UK resident to claim the full exemption. This residency requirement was tightened in the 2024 Spring Budget when the government moved from a domicile-based regime to a residence-based regime for inheritance tax. A long-term UK resident is broadly someone who has been UK resident for at least 10 of the preceding 20 tax years.
What happens when the surviving spouse later dies
The spousal exemption defers the IHT charge but does not eliminate it. When the surviving spouse later dies, any pension assets they inherited and have not used will form part of their own estate for IHT purposes. The same April 2027 rules apply at second death.
However, the surviving spouse benefits from the transferable nil-rate band (TNRB) and the transferable residence nil-rate band (TRNRB). Any unused nil-rate band from the first death can be carried forward to the second death, meaning a couple can potentially pass on up to £1 million IHT-free (£325,000 NRB plus £175,000 RNRB, doubled). Both thresholds are frozen until 2031.
Planning implications for married couples
The spousal exemption changes the planning calculus for many married couples and civil partners. Before the April 2027 reform, the typical optimisation involved nominating non-spouse beneficiaries (such as children) for pension death benefits because those payments were outside the estate entirely. After April 2027, with pension assets in the estate, that nomination would trigger a 40% IHT charge unless the estate sits below the nil-rate bands.
For couples where the first-to-die has a large pension and the survivor needs the income, the spousal exemption restores the natural planning order: pass to spouse first, then plan again at second death. For couples where the survivor does not need the pension income and the goal is to pass wealth efficiently to the next generation, the calculation is more complex and depends on the survivor's own estate value, age, and capacity to use pension drawdown to gift during their lifetime.
The age 75 trap and the 67% combined rate
For pension members who die after age 75, beneficiaries face both IHT on the pension funds within the estate and income tax at their marginal rate on any subsequent drawdown. Where the spousal exemption applies at first death, IHT is deferred; but if the surviving spouse later dies after age 75 and the pension is passed to a non-spouse beneficiary, the combined IHT and income tax effective rate can reach 64% to 67% for a higher or additional-rate taxpayer beneficiary.
This dynamic, set out in industry analysis from Royal London, M&G Wealth, and Womble Bond Dickinson, means many advisers are now revisiting standard pension drawdown advice. For some clients, drawing pension funds earlier (perhaps to gift during lifetime or fund non-pension investments) may become more tax-efficient than the historic strategy of preserving pension wealth for tax-free inheritance.
What is not covered by the exemption
The spousal exemption is narrowly drawn. It does not cover pension assets left to children, even adult children acting as financial dependants of the deceased. It does not cover pension assets left to unmarried cohabiting partners. It does not cover pension assets left to siblings, parents, or any other non-spouse, non-charity beneficiary.
Death in service benefits payable from registered pension schemes are excluded from the IHT regime entirely, so they pass without IHT regardless of who they are paid to. Joint life annuities are also excluded, since survivor rights paid from a joint life annuity are not part of the member's estate.
Editorial disclaimer: Estate planning is highly dependent on individual circumstances including marital status, the value and composition of assets, residency, and family relationships. This article is for general information only and does not constitute financial, tax, or legal advice. Anyone affected by the April 2027 changes should seek advice from a qualified financial adviser and a solicitor experienced in estate planning.
Frequently asked questions
Does the spousal exemption apply to cohabiting partners?
No. The spousal exemption applies only to legally married couples and civil partners. Cohabiting partners are treated as non-spouse beneficiaries and pension assets passing to them will be within the deceased's estate for IHT.
What if my spouse lives outside the UK?
The full spousal exemption requires the surviving spouse to be a long-term UK resident, broadly someone who has been UK resident for at least 10 of the preceding 20 tax years. Partial exemptions may apply in some circumstances.
Does the exemption apply to defined benefit pensions?
The April 2027 rules apply to most defined contribution pensions and many defined benefit death benefits paid as lump sums. Pension scheme administrators will provide guidance on which benefits within a specific scheme are in or out of scope.
Can I still nominate my children as pension beneficiaries?
Yes, you can still nominate any beneficiary you choose. However, after April 2027, pension assets passing to non-spouse beneficiaries will form part of your estate for IHT purposes and may be subject to a 40% IHT charge if your estate exceeds the nil-rate bands.
What happens to my unused nil-rate band when my spouse dies?
The unused nil-rate band and residence nil-rate band from the first death can be transferred to the surviving spouse and used at their later death. A couple can potentially pass on up to £1 million IHT-free where both bands apply in full and the residence is left to direct descendants.
How we verified
This article draws on the HMRC Inheritance Tax on pensions: technical note published 11 May 2026, the Autumn Budget 2025 supporting documents, Finance Act 2026, and analysis from Royal London, Legal & General, M&G Wealth, Womble Bond Dickinson, and The Private Office. IHT thresholds reflect the £325,000 nil-rate band and £175,000 residence nil-rate band, both frozen until 2031. Long-term UK residence definitions reflect the Spring Budget 2024 reforms to the IHT residency regime.
