Married couples handed 'reassurance' over new inheritance tax change

Inheritance tax changes have been explained as a couple are reassured they can still pass on pensions tax free. In the wake of the Labour Party Budget, one couple reached out to Liberal Democrats Pensions Minister Sir Steve Webb on This is Money.

They asked: "I have a question about the changes to tax on inherited pensions announced in the Autumn Budget. From April 2027, if you are married and have unused defined contribution pensions when you die, will your spouse inherit the pension tax-free, as would be the case for the house, savings and so on?

"Would your spouse then be able to draw on the pension at their marginal tax rate? When your spouse dies, would the combined inheritance tax allowance then be applied to any pension remaining? Thank you. I think many people my age would be interested to hear the answers."

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Former Pensions Minister Webb told This is Money: "Following the death of the spouse, the estate will be valued in the normal way – but now including pensions – and any remaining inheritance tax allowances would be applied to this total figure.

"But in terms of the practicalities of all of this, the new system will unfortunately be much more involved for grieving families."Before moving on to what changed in the Budget, it's important to appreciate that the basic features of inheritance tax remained unaltered, he said.

This means you still have a 'nil rate band' of £325,000 per person to set against the value of your estate. This figure will remain the same until at least 2030, and any unused 'nil rate band' on the death of the first member of a couple can be used by a surviving spouse.

You still have a 'residence nil rate band' of up to £175,000 per person, too. Any unused part of this can also be transferred to a surviving spouse, meaning the allowance for a couple could be £1million, Suir Steve has also gone on to explain.

And transfers between spouses remain free of inheritance tax.