Spousal Inheritance Exemption: When IHT Protection Has Gaps

The inheritance tax spousal exemption is one of the most powerful reliefs in the UK tax system. Married couples and civil partners can pass unlimited wealth to each other during life or on death without triggering an IHT charge. For many families, this feels like a complete shield. It is not.

There are several situations where the exemption either does not apply at all, applies only in a limited form, or creates planning problems that surface when the surviving spouse later dies. Understanding those gaps before they become expensive surprises is the core purpose of this guide.

How the Spousal Exemption Works

When one spouse dies, assets passing directly to the surviving spouse are fully exempt from inheritance tax under the spousal exemption. There is no upper limit on the value involved. A £5 million estate passing entirely to a surviving UK-domiciled spouse generates zero IHT at that point.

The nil rate band (NRB) of £325,000 and the residence nil rate band (RNRB) of £175,000 are not used up when assets pass to a spouse. Instead, any unused NRB and RNRB are transferred to the survivor's estate. When the second spouse dies, personal representatives can claim up to 100% of the first spouse's unused NRB on top of the survivor's own NRB.

In practice, for a couple who both hold the maximum allowances in 2026/27:

• Combined NRB: £325,000 + £325,000 = £650,000
• Combined RNRB (if a qualifying home passes to direct descendants): £175,000 + £175,000 = £350,000
• Combined threshold: up to £1,000,000 sheltered from 40% IHT

This is generous planning, but it only works well when both spouses are UK-domiciled and the estate structure is set up correctly.

Gap 1 — Non-UK Domiciled Spouses

The most significant and often overlooked gap applies when the deceased is UK-domiciled but the surviving spouse is not. HMRC only grants the unlimited exemption where the recipient spouse is also UK-domiciled.

If your spouse is non-domiciled (for example, they were born abroad and have never settled in the UK permanently), only £325,000 can pass to them free of IHT. Any amount above that is taxed at 40%.

There is a remedy: a non-domiciled spouse can elect to be treated as UK-domiciled for IHT purposes. Making this election means their worldwide assets become subject to UK IHT, which may or may not be beneficial depending on where those assets are held and what double-tax treaties apply.

This is an area where specialist advice is essential. The election is irrevocable in many circumstances and triggers UK IHT exposure on overseas assets that would otherwise fall outside the net.

Gap 2 — Unmarried Partners Receive Nothing

The spousal exemption is strictly limited to legally married couples and registered civil partners. Cohabiting partners — even those who have lived together for decades, share children, own a home jointly, and hold themselves out publicly as a couple — receive no exemption at all.

Assets left to an unmarried partner are taxed against that partner's own £325,000 NRB. Any amount above that threshold is taxed at 40%.

For a long-term couple where one partner has built significant assets in their own name — common where one partner ran a business or one partner's career advanced faster — this can create a large and entirely avoidable IHT bill.

The only solutions are:

• Marriage or civil partnership
• Lifetime gifting (subject to the seven-year rule for potentially exempt transfers)
• Life insurance written into trust to cover the IHT liability

There is no equivalent of the spousal exemption for cohabitees under current UK law, and no credible indication this will change in the near term.

Gap 3 — The RNRB Taper Above £2 Million

The residence nil rate band (RNRB) of £175,000 is designed to help families pass a home to children or grandchildren without excessive IHT. However, it comes with a taper that hits wealthier estates hard.

For every £2 by which the estate exceeds £2 million, the RNRB reduces by £1. An estate of £2.35 million loses the entire £175,000 RNRB. Because each person has their own RNRB, a couple can potentially lose up to £350,000 of relief through the taper.

This matters for the spousal exemption because the spousal exemption can inadvertently inflate the second estate. When the first spouse leaves everything to the survivor, the survivor's estate grows. If that estate then exceeds £2 million, the RNRB starts tapering away, increasing the IHT bill on the second death.

Careful planning around the first death — such as using a discretionary trust or leaving some assets directly to children — can preserve RNRB eligibility by keeping the survivor's estate below the £2 million threshold.

Gap 4 — Assets Outside the Will

The spousal exemption applies to assets that actually pass to the surviving spouse. Not every asset does so automatically.

Assets that pass outside the will include:

Jointly owned property held as joint tenants. These pass by survivorship to the co-owner, which is typically the spouse — usually fine. But if the property is owned as tenants in common (common in second marriages and properties with unequal contributions), the deceased's share passes under their will, not automatically.

Nominated pension benefits. Most defined contribution pensions allow you to nominate a beneficiary. The trustees have discretion but usually follow your nomination. If you nominated a former partner, a sibling, or your estate rather than your current spouse, the spousal exemption may not apply to the pension payout. Reviewing nominations regularly is essential.

Life insurance policies. Policies not written into trust form part of your estate and are subject to IHT. If the policy is written into trust for the benefit of your spouse, the proceeds may bypass the estate entirely.

Gifts made in the seven years before death. These are potentially exempt transfers (PETs) that can become chargeable if death occurs within seven years. Gifts to anyone other than your spouse during that window are subject to taper relief and potentially IHT. Gifts between spouses are exempt.

Gap 5 — The Pension Inclusion from April 2027

Currently, most pension funds — particularly defined contribution pots — fall outside the deceased's estate for IHT purposes. This makes pensions one of the most effective tools in estate planning: large accumulated pension balances can pass to heirs without triggering the 40% IHT charge.

From April 2027, HMRC will bring unused pension pots into the IHT calculation. The exact mechanics are still being finalised, but the broad direction is clear: the IHT-free status of large pension balances will end.

For couples relying on pension funds as a key part of their estate planning — particularly those who have drawn down other assets first precisely to leave pensions untouched — this change is material. The spousal exemption will still apply to pension assets passing to a spouse, but the pension pot will be part of the taxable estate when it later passes to children or grandchildren.

If you have significant pension balances and your estate planning strategy assumed those pots would pass IHT-free, reviewing that strategy before April 2027 is advisable.

Gap 6 — Domicile and Worldwide Assets

UK IHT is not limited to UK assets. If you are UK-domiciled, your worldwide estate is subject to IHT. This can create complexity where overseas assets are involved.

Assets held abroad that pass to a UK-domiciled spouse are still covered by the spousal exemption. However, the valuation of overseas property, double taxation treaty interactions, and the mechanics of claiming relief in multiple jurisdictions can be administratively complex.

If you hold overseas property or significant foreign investments, specialist advice on how those assets interact with UK IHT — and how the spousal exemption applies — is worth obtaining before death makes the question academic.

Practical Planning Steps

Given the gaps above, here are the practical areas to review:

Check domicile status. Both spouses should be clear on their domicile position, particularly if either has lived abroad or has foreign ties.

Review pension nominations. Nominations should reflect your current wishes and relationship. Out-of-date nominations are a common and avoidable problem.

Consider tenants in common structures. For second marriages in particular, owning property as tenants in common with a carefully drafted will can give both flexibility and RNRB protection.

Model the second estate. If the spousal exemption defers IHT to the survivor's death, work out what that estate will look like. If it is above £2 million, consider whether assets should be redirected at the first death to preserve RNRB.

Revisit pension planning before April 2027. If pension assets form a major part of your estate, explore whether the current rules create a planning window before the 2027 changes take effect.

Summary

The inheritance tax spousal exemption is genuinely powerful and covers the vast majority of straightforward cases. A married couple, both UK-domiciled, passing assets between themselves during life or on death will almost always do so free of IHT.

The gaps emerge at the edges: non-UK domiciled spouses, unmarried partners, estates that drift above the £2 million RNRB taper, assets that pass outside the will to someone other than the spouse, and the coming change to pension taxation from April 2027.

None of these gaps are unfixable with proper planning. Most of them are entirely avoidable with early advice. The risk is assuming that the spousal exemption provides a blanket shield when the reality is more nuanced.

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This article is for information only and does not constitute financial or tax advice. Tax rules may change. Consult a qualified adviser for your specific situation.