One of the most persistent misunderstandings about the Finance Act 2026 pension changes is the role of the spousal exemption. Many married pension holders assume that because assets can pass between spouses free of IHT, the pension is permanently protected from inheritance tax. The reality is more nuanced.
What the spousal exemption does
The spousal exemption allows assets to pass between spouses and civil partners free of inheritance tax, regardless of the size of the transfer. It applies to pensions as well as other assets, and continues to apply from April 2027. Pension funds passing to a surviving spouse will not attract IHT on the first death under the new rules.
What the spousal exemption does not do
The spousal exemption defers the IHT liability — it does not remove it. When the pension passes to the surviving spouse, it becomes part of that spouse's estate. If it remains unspent at the second death, it will be subject to IHT at that point.
This means that for a married couple where both spouses have died on or after 6 April 2027, the pension that passed via the spousal exemption on the first death will be included in the second estate's IHT calculation. The benefit of the spousal exemption is deferral, not exemption.
How this affects planning
Before April 2027, a married couple could legitimately plan for the pension to pass to the surviving spouse and then to children, with no IHT at either point. From April 2027, IHT is deferred on the first death but will apply on the second death if the pension is unspent.
This changes the second-death estate planning conversation significantly. The surviving spouse's estate plan now needs to account for the pension that has been deferred into it, and the spending and drawdown strategy of the surviving spouse becomes part of the overall estate plan rather than just a personal income decision.
Nomination decisions
Whether to nominate a spouse as the primary beneficiary of pension death benefits — and in what proportion — is now a more complex decision than it was. Nominating the spouse defers IHT but potentially increases the surviving spouse's estate. Nominating children directly may trigger IHT sooner but could produce a better combined outcome depending on the relative estate sizes and tax positions. This is an area where modelling the specific numbers is essential before deciding.
The transferable nil-rate band
One planning consideration that remains valuable is the transferable nil-rate band. Any unused nil-rate band from the first death can be transferred to the surviving spouse, potentially giving the second estate a combined threshold of £650,000 (standard NRB) or up to £1 million including the residence nil-rate band. This does not change how the pension is taxed, but it affects how much of the overall estate — including the pension — falls within the tax-free threshold.