Most couples assume the spousal exemption removes inheritance tax from the picture. For families with children planning to leave assets on the second death, the reality is more complicated.
May 2026 : 8 min read - Part of the FreeBefore65 UK Retirement Planning Basics series.
The £1 million inheritance tax allowance for couples is one of the best-known numbers in UK estate planning. It's also one of the most misunderstood. The number is real, but what it protects and what it doesn't protect rarely matches what families assume.
For couples with children planning to leave assets onwards, the gap between assumption and reality matters. The April 2027 change to pension inheritance tax adds urgency. So this post unpacks the £1 million figure, what the spousal exemption actually does, and what it doesn't solve for families on the second death.
A word on my own position before I get into the structure. I'm in my late fifties, recently retired, married with children, with a household estate in the territory where these rules matter. The April 2027 pension change moves our combined position from comfortably within thresholds to potentially exposed. The age gap with my wife means the planning has a long window on her side of the equation, which the spousal exemption strategy can lean on, but only with active joint planning. I've been working through this in preparation for the IFA conversation that's now on my calendar, and writing this post has been part of my own thinking.
What the spousal exemption actually does
The technical relief is straightforward. Transfers of assets between spouses or civil partners are fully exempt from inheritance tax. No limit. This applies to lifetime gifts and to assets passed on death. If you leave everything to your spouse when you die, no inheritance tax is payable on your estate at that point, regardless of size.
This is unusual in the UK tax system. Most reliefs have caps, conditions, or staged tapers. The spousal exemption doesn't. It's a complete, unlimited deferral as long as both spouses are long-term UK residents. (There are separate rules for non-domiciled spouses that this post doesn't cover.)
There's also the question of unused allowances. Each person has two inheritance tax allowances: the nil-rate band of £325,000, and the residence nil-rate band of £175,000 available when the main home passes to direct descendants. If the first spouse to die doesn't use these allowances because everything passes to the surviving spouse under spousal exemption, the unused portions transfer to the surviving spouse. On the second death, the survivor's estate is assessed against the combined allowances.
Where the £1 million figure comes from
The £1 million is built up as follows.
- Two nil-rate bands of £325,000 each = £650,000.
- Two residence nil-rate bands of £175,000 each = £350,000.
- Combined total = £1 million.
For a married couple where everything passes to the survivor on first death, and the survivor's estate eventually passes to direct descendants, the £1 million is the maximum tax-free threshold. Anything above that on the survivor's death is taxed at 40%.
That's the headline. It's a substantial relief, especially for couples whose estate sits near or just over the threshold.
What the spousal exemption doesn't do
Here's where the assumption usually breaks. Spousal exemption defers inheritance tax to the second death. It doesn't eliminate it. For families with children, this matters because the children typically inherit on the second death, which is when the consolidated estate meets the IHT calculation.
A few specific limits on the £1 million figure are worth flagging.
The estate value above £1m is taxed at 40% on the second death. A £1.3m estate faces a £120,000 IHT bill (£300,000 over the threshold × 40%). A £1.6m estate faces £240,000.
The headline assumes the home passes to direct descendants. If the home goes to anyone other than children, stepchildren, adopted children, or grandchildren, the residence nil-rate band doesn't apply. The combined threshold drops from £1m to £650k. Couples without children, or who plan to leave assets to other relatives, simply don't have the headline £1m available.
The combined allowance tapers above £2 million. This catches families who don't think of themselves as particularly wealthy but whose combined assets cross the threshold. The residence nil-rate band reduces by £1 for every £2 the estate exceeds £2m. At £2.35m the RNRB is gone entirely. So an estate of £2.35m faces IHT on £1.7m (the estate value minus the remaining £650k nil-rate bands), a bill of £680,000.
Why pensions change the calculation from April 2027
Until April 2027, defined contribution (DC) pension pots sit outside the estate for IHT purposes. From that date, most unused pension funds will be brought into scope. [The April 2027 Pension IHT Change: What's Actually Coming and Who It Affects]
For couples with pensions, the second-death calculation looks materially different. Consider a couple with £400,000 in property, £200,000 in ISAs, and combined unused pension pots of £800,000. Currently, the second-death estate is £600,000 for IHT purposes. Comfortably under £1m, no IHT issue. From April 2027, the same couple has an estate of £1.4m for IHT. £400,000 above threshold. A potential bill of £160,000.
This is the change that catches more families than the headline number suggests. The Office for Budget Responsibility estimates around 10,500 estates will newly face inheritance tax in 2027-28 because of this change.
The interaction with the £2m taper threshold matters too. Pensions added to the estate calculation push some families above the £2m line, triggering RNRB taper and increasing the effective tax burden disproportionately to the underlying wealth growth.
What this means for families with children
The strategic shape of the planning shifts from "minimise IHT on my death" to "minimise IHT on the second death, on the consolidated estate, given that pensions now count from April 2027." A few practical implications follow.
Joint planning matters more than individual planning. The spousal exemption strategy only works if both partners continue the planning between first and second death. If the surviving spouse doesn't pick up the work, the consolidated estate sits un-managed and the IHT bill compounds.
Lifetime gifts start the 7-year clock earlier. Gifts above the annual exemptions become Potentially Exempt Transfers. Survive 7 years and they fall completely outside the estate. For families intending to support children with property purchases or other significant help, lifetime gifts move money out of the estate over time, reducing the eventual IHT exposure.
Pension draw-down sequencing changes from April 2027. The pre-change wisdom of leaving the pension untouched and spending other assets first was built on pensions being IHT-efficient. From April 2027, the logic reverses for estates above the threshold. Drawing pension during lifetime, particularly during low-income years, can be more tax-efficient than leaving it to be assessed at 40% on death.
Cross-spouse pension planning becomes relevant where one spouse has substantially more pension wealth than the other. The consolidated estate on second death sits more heavily on the assets of whichever spouse dies second. This may inform decisions about which spouse draws first, who gifts first, and which assets sit where.
Whole-of-life insurance and trusts are specific tools to manage second-death IHT liability. Both come with their own costs and complexity, and need to be considered alongside an IFA rather than in isolation. I'll cover each in separate posts when I've worked through them in my own planning.
Pulling this together
Spousal exemption is genuinely valuable. It defers IHT on the first death entirely, allows the surviving spouse to inherit the deceased's unused allowances, and buys time for planning to continue between first and second death.
It doesn't solve the underlying IHT exposure for families with children, because the children typically inherit on the second death. The £1m doesn't cover assets above the threshold. The £2m taper claws back relief from larger estates regardless of the spousal exemption. From April 2027, pension wealth that previously sat outside the calculation comes into scope.
For most readers planning to leave assets to children, the practical conclusion is that the IFA conversation is the actual work. The £1 million figure is a useful frame for understanding the structure, but it's not a planning destination on its own.
Specific tools (whole-of-life insurance, trusts, pension draw-down sequencing, lifetime gifting strategies) will get their own posts when I've worked through them with regulated advice. This post is the foundation. The specifics will follow as the planning unfolds.
Part of the FreeBefore65 UK Retirement Planning Basics series.
Tony writes about his personal journey to early retirement at freebefore65.co.uk. He is not a financial adviser. All content reflects his own experience and research and should be taken as a starting point for your own thinking, not as professional advice. Always take regulated independent advice before making significant financial decisions.
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