Heirs and who pays
Pension left to a spouse or civil partner: the two deaths
A pension that passes to a husband, wife or civil partner is free of inheritance tax when it passes. The question is what happens to it next.
A pension left to a spouse or civil partner is exempt from inheritance tax at the first death, including for deaths on or after 6 April 2027, when unused pension funds join the estate. Section 69 of the Finance Act 2026 extends the spouse exemption of section 18 of the Inheritance Tax Act 1984 to pension benefits the surviving partner receives, whether paid as a lump sum or kept in drawdown. The tax is postponed rather than removed: whatever is still in the inherited pot when the survivor dies counts in the survivor's estate, which can then use both partners' nil-rate bands and residence bands, transferred as unused percentages, up to £1,000,000 in all. In our example David dies first with a £350,000 pot, half of a £500,000 home and £100,000 of savings, all left to Margaret: the tax is £0. When Margaret dies with the home, £200,000 of savings and both pots untouched, her estate pays £80,000, against £0 had she died before the change.
Bands passed on at the first death
Second estate threshold
£1,000,000
| Nil-rate band transferred | 100 % |
| Inheritance tax at the second death | £40,000 |
Residence band assumed fully unused at the first death.
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
Why the first death usually costs nothing
The exemption between spouses is the oldest relief in the inheritance tax code, and it covers everything that passes from one partner to the other: the home, savings, shares and, after the Finance Act 2026, pension money too. The amendments made by section 69 add pension benefits to the list of property that qualifies when the person who becomes entitled is the member's spouse or civil partner. So the change of 6 April 2027 brings David's pension into his estate under section 150A, and the same Act lets it out again because Margaret is the one who takes it. His estate is worth £700,000 for the purposes of the residence band taper, the spouse exemption covers £700,000 of it, and the chargeable amount is £0.
Two conditions are worth reading closely. The exemption applies to what the survivor actually receives, so a nomination form naming the spouse is not enough if the scheme administrator, using its discretion, pays someone else. And the couple must be married or in a civil partnership at the date of death. Long cohabitation does not count, as the guide for unmarried couples shows with figures.
Where the pot goes next
A spouse who inherits a money purchase pot usually has a choice: take it as a lump sum, leave it invested in beneficiary drawdown, or buy an annuity with it. Each choice moves the money to a different place for the second estate. Cash taken out and kept in a bank account becomes ordinary savings. A pot left in drawdown remains pension property, and from 6 April 2027 it is counted in the survivor's estate when she dies, because it can then pay death benefits to whoever she has nominated. Money spent on living costs has gone and counts nowhere.
Seen over two deaths, the spouse exemption works as a deferral. Nothing is charged while the money moves between the couple, but every pound still held at the second death meets the bands of that second estate, and from April 2027 that includes pension pounds that used to stay outside.
Margaret and David, followed to the second death
David is 78 when he dies. His pot of £350,000 goes to Margaret by nomination; his half of their £500,000 house and his £100,000 of savings pass under his will. Nothing is chargeable, so none of his nil-rate band or residence band is used. Margaret leaves the inherited pot untouched beside her own £150,000 pension and dies six years later, leaving everything to their two children.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate counted for inheritance tax | £700,000 | £1,200,000 |
| Nil-rate band and residence band used | £1,000,000 | £1,000,000 |
| Inheritance tax | £0 | £80,000 |
| of which on the pension | £0 | £33,333 |
| Income tax paid by the heirs on the pension | £224,934 | £209,934 |
| Each of 2 heirs keeps | £487,533 | £455,033 |
Her representatives claim David's unused bands, which brings her threshold to £1,000,000. Without the pension change her estate would sit below it. With the change, the pots lift the estate to £1,200,000, the tax becomes £80,000, and £33,333 of that falls on the pension money. Because Margaret was over 75, each child also pays income tax on what they draw, after deducting the inheritance tax the pension bore, so each keeps £455,033 against £487,533 under the old rules.
How much of the inherited pot is left matters
The same household gives very different second-death bills depending on what Margaret does with David's pot in the years she survives him. The table keeps her home, savings and own pension fixed and changes only the part of his pot still invested when she dies.
| Inherited pot left | Margaret’s estate | Threshold used | Tax at her death | Of which on pensions |
|---|---|---|---|---|
| £350,000 | £1,200,000 | £1,000,000 | £80,000 | £33,333 |
| £200,000 | £1,050,000 | £1,000,000 | £20,000 | £6,667 |
| £0 | £850,000 | £1,000,000 | £0 | £0 |
Drawing the money is not free either. If the first partner died at 75 or over, the survivor pays income tax on every withdrawal at her own marginal rate, which can reach 40 % or more on a large one. Some widows and widowers draw an inherited pot gradually to stay in a lower band; others leave it alone. The right balance depends on income needs, health and the size of the rest of the estate, which is a conversation for a regulated adviser rather than a rule of thumb.
Income tax while the survivor draws it
The spouse exemption is an inheritance tax rule only. GOV.UK’s page on inherited pensions sets out the income tax side, which turns on the age of the member who died. When David died under 75, lump sums paid to Margaret are generally free of income tax within his lump sum and death benefit allowance, and drawdown income from his pot is tax free. When he died at 75 or later, as in our example, every payment is taxed as Margaret's income through PAYE. No inheritance tax was borne at the first death, so there is nothing to deduct under the new section 567B: the deduction only becomes useful for the children after the second death.
Splitting the nomination between the survivor and children
Some members nominate part of the pot to children at the first death, for example to help with a mortgage. The part paid to the children is not exempt. If David had split his £350,000 pot equally, £175,000 would have been chargeable at his death. That still falls inside his nil-rate band, so his estate would owe £0, but only 46.2 % of his band would be left to transfer to Margaret. The page on transferring the nil-rate band explains how that percentage is worked out and why it matters more than the pounds.
Pensions that never reach either estate
Not every pension passed to a spouse needs the exemption at all. Section 150A lists excluded benefits that are left out of the estate whoever receives them: a dependants' scheme pension, such as the survivor's pension of a defined benefit scheme; a joint life annuity bought together with the member's own annuity; and death in service benefits from a job the member still held. A widow receiving a scheme pension from her husband's employer has nothing extra in her estate as a result, though she pays income tax on the payments. The defined benefit page covers those schemes.
What the executors of each estate deal with
At the first death, the executors still report the pension even though no tax is due, because the value matters for the residence band taper and for the transfer claim later. The spouse exemption takes the whole value back out. At the second death, Margaret's representatives report both pensions, claim David's unused bands using his estate papers, and are liable for the tax with the beneficiaries, as the guide on who pays sets out. Keeping the first estate's records is therefore part of planning for the second.
The calculator above shows the second estate's threshold for any amount left to others at the first death. None of this is personal advice. The order of deaths, the shape of the nomination and the pace of withdrawals all change the result, and the representatives, a solicitor or a regulated financial adviser should check a real family's position.