Does the Pension Inheritance Tax Spouse Exemption Cover Your Children Too?

• From 6 April 2027, unused pension funds and death benefits count towards your estate for inheritance tax under Finance Act 2026, Section 150A IHTA 1984.
• The spouse exemption on your pension death benefits is unlimited only if you and your spouse are both long-term UK residents under the residency test.
• If your spouse is not a long-term UK resident, Section 18(2) IHTA 1984 caps your exemption at the nil-rate band, £325,000 (2026 to 2027).
• Pensions left to your children carry no spouse-style exemption and can face inheritance tax at 40% (2026 to 2027) once your estate exceeds its allowances.
• A dependants’ scheme pension paid as ongoing income to your dependent child is excluded from inheritance tax, but a lump sum usually is not.
• Business Relief and Agricultural Relief never apply to your pension death benefit, even where other estate assets clearly qualify for them.

Long-term UK resident. UK tax resident for at least 10 of the previous 20 tax years. This test replaced domicile for inheritance tax purposes from 6 April 2025, under Finance Act 2025, Schedule 13.

Dependants’ scheme pension versus lump sum death benefit. Ongoing income paid to a dependant, commonly your spouse, civil partner, or a financially dependent child, after your death. A lump sum death benefit is a single payment instead, and HMRC treats the two very differently.

The pension inheritance tax spouse exemption lets your surviving spouse or civil partner inherit your pension free of inheritance tax in most circumstances. From 6 April 2027, your unused pension funds and death benefits count towards your estate for inheritance tax under Finance Act 2026. HMRC calls this notional pension property, defined under new Section 150A IHTA 1984.

Your personal representatives become responsible for reporting and paying any tax due. HMRC’s May 2026 technical note confirms exempt beneficiaries sit in sections 18, 23, 24, 24A, 25 and 27 IHTA 1984. These cover spouses, civil partners, charities, and a few other qualifying recipients.

Bluebond’s inheritance tax planning service reviews which of your beneficiaries fall into each category, and where your nominations leave gaps.

The spouse exemption on your pension death benefit is unlimited only where you and your spouse are both long-term UK residents. If you are a long-term UK resident and your spouse is not, Section 18(2) IHTA 1984 caps the exempt value at the nil-rate band. That cap is £325,000 for the 2026 to 2027 tax year.

This is a lifetime limit, reduced by any spouse exemption already claimed. Your spouse can elect to be treated as a long-term UK resident, restoring the unlimited exemption. This brings their worldwide assets into UK inheritance tax, and the election only lapses once they have been non-UK resident for ten consecutive tax years.

Inheritance tax at 40%, the rate for the 2026 to 2027 tax year, can apply once a pension passes to your children. Pensions left to your children receive no equivalent to the spouse exemption. Your total estate can exceed your nil-rate band and residence nil-rate band. On a £400,000 pension taxed in full at that rate, the charge is £160,000.

If you die aged 75 or over, beneficiaries may also owe income tax on withdrawals. The portion matching inheritance tax already paid is excluded from taxable income.

A trust structure may suit you better than a direct nomination in some cases. Bluebond’s article on putting pension death benefits into trust sets out when that still helps after April 2027.

A dependants’ scheme pension paid as ongoing income to your financially dependent child is excluded from inheritance tax under Section 150A(6) IHTA 1984. Any child under 23 qualifies, as does an older child who is dependent because of disability. A lump sum paid instead of ongoing income usually does not qualify, regardless of the pension arrangement.

Whether your scheme offers ongoing income decides whether this exemption applies. So does whether your child meets the dependency conditions in paragraph 15 of Schedule 28 Finance Act 2004.

Bluebond’s advisory pathway, as currently run, keeps this distinction clear in practice. Your Bluebond tax planner explains in general terms how nominating a dependants’ scheme pension for your child could fit your wider estate plan. Any personal recommendation on the pension itself then comes from Bluebond’s FCA-regulated financial advice partner, with both folded into one agreed implementation plan.

Your notional pension property is not qualifying business property, agricultural property, or an interest in land. So Business Relief, Agricultural Relief, and the 10-year instalment option under Section 227 IHTA 1984 never apply to it. A family business sheltered by Business Relief gets no such shelter for your pension pot.

One relief survives: quick succession relief under Section 141 IHTA 1984 applies if pension property already taxed is taxed again within five years.

Bluebond planners regularly see clients assume the spouse exemption is a blanket family exemption. It is actually a rule tied to marriage, civil partnership, and residency status. 19 out of 20 Bluebond clients legitimately pay zero inheritance tax, and rarely by relying on a single exemption. They combine the spouse exemption, correct nominations, and a reviewed expression of wishes into one plan.

• Check your spouse or civil partner’s long-term UK resident status.
• Confirm your expression of wishes form reflects who you want to benefit.
• Identify which children, if any, count as financially dependent.
• Ask your scheme whether death benefits can be paid as income.
• Check whether your total estate, including pensions, exceeds your allowances.

• Assuming a pension death benefit and a dependants’ scheme pension are taxed alike.
• Leaving an outdated wishes form naming children where a spousal nomination is more efficient.
• Electing long-term resident status without weighing the worldwide exposure it creates.
• Assuming Business Relief or Agricultural Relief can offset pension tax.
• Waiting until April 2027 to review nominations, when representatives face tight deadlines.

Pension inheritance tax from April 2027 rewards you for checking the detail rather than the headline. The spouse exemption still shelters most surviving partners with matching residency status. Your children rarely get the same protection, unless a genuine dependants’ scheme pension applies. Reviewing your nominations now is one of the most useful steps you can take.

Bluebond’s Pre-April 2027 Pension Checklist covers six further decisions worth making before the rules change. A Bluebond Inheritance Tax Mitigation Plan reviews your pension nominations alongside the rest of your estate. Or start with our free webinar to see how the April 2027 changes could affect a family in your position.

Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.