Couples and inheritance tax: what changes after a first death

When a plan holds two people, the planner taxes each of them separately, applies Marriage Allowance where the conditions are met, and models what changes when the first person dies: the survivor's income, spending and allowances, and what passes to them. At the end of the plan it estimates inheritance tax on the estate, and from April 2027 that estimate includes unused defined contribution pension pots.

A plan can hold one person or two. Two people can be married, civil partners or cohabiting. The planner shows how the two plans interact: personal allowances used, who draws what, and what changes after the first death.

How are two people taxed?

UK tax is charged on each person separately, so each has their own personal allowance, tax bands, dividend and savings allowances, capital gains exemption, ISA allowance and pension allowances. The model works out two tax calculations every year. Joint accounts and properties are split between the partners by the ownership share you enter, and income and gains are taxed by share. ISAs and pensions always belong to one person.

How does Marriage Allowance work in the planner?

Married couples and civil partners can transfer £1,260 of one partner's personal allowance to the other in 2026/27 when the receiving partner pays tax at the basic rate (in Scotland, the starter, basic or intermediate rate). Where the conditions are met and the Marriage Allowance setting is on (it is on to begin with), the model transfers the amount and gives the receiving partner a tax reduction at the basic rate. It is not available to cohabiting couples.

What does balancing taxable income do?

When "balance taxable income" is on, pension withdrawals come from whichever partner would pay the lower rate on the next pound. That tends to use both partners' allowances and lower bands. It is a setting, on to begin with, and can be turned off, in which case each pension is drawn separately.

What changes after the first death?

Each person is planned to their chosen age. When the first one dies, the model:

• stops their earnings and other personal income;
• continues each annuity to the survivor, and each defined benefit pension to a surviving spouse or civil partner, at the survivor percentage set for it;
• reduces household spending to the survivor percentage (70% unless changed);
• passes their accounts, properties and pension pots to the survivor. Married couples and civil partners can do this tax-free. For cohabiting partners the model first estimates inheritance tax on the deceased's share, and inherited ISAs lose their tax wrapper;
• from then on applies one person's allowances.

What happens to a pension when a partner dies? explains the rules for survivor's pensions, inherited pension pots and the State Pension, with an invented couple whose first death comes before or after 75.

How is inheritance tax estimated?

At the end of the plan the model estimates an inheritance tax figure. It adds up the estate (savings, investments, property and the main home, less debts), subtracts the nil-rate band and the residence nil-rate band, and charges the main rate on the rest. For married couples and civil partners both bands are doubled, on the assumption that the first partner's unused bands pass to the survivor in full. The residence nil-rate band tapers away for larger estates.

Inheritance tax on pensions from April 2027

From 6 April 2027 most unused pension funds and pension death benefits are brought into the value of a person's estate for inheritance tax. The change is in Finance Act 2026, and HMRC's technical note sets out the detail:

• Excluded. Death in service benefits from a registered pension scheme, and dependants' scheme pensions, whatever kind of pension arrangement pays them. A dependant's or nominee's annuity bought together with the member's lifetime annuity is excluded too.
• Still exempt. What passes to a surviving spouse or civil partner, and to registered charities, under the existing exemptions.
• Who pays. The personal representatives of the person who died report and pay any inheritance tax due on unused pensions.

The planner includes unused defined contribution pension pots in its end-of-plan estimate from the 2027/28 tax year. Defined benefit pensions and annuities are incomes in the model, not pots, so they are not added. The rule cannot be switched off in the planner, so a plan cannot show the same estate with and without it. Inheritance tax on pensions from April 2027 explains the change in more detail, with an invented couple whose pension is left unused or mostly spent.

Tax rules can change. These are the rules as legislated at the time of writing; GOV.UK and HMRC publish any updates.

What this looks like in the planner

Jo and Chris are an invented married couple. Chris is planned to 80 and Jo to 92. The picture at the top of this page is their Wealth view: after Chris' death, household spending falls to 70% and Chris' pension and savings pass to Jo, so the household's savings and pensions carry on in Jo's name. The inheritance tax estimate at the end of the plan, in 2054/55, is £226,057 on an estate of £1,471,093, in today's prices.

The pictures in the sections above show the same plan two other ways: tax for each person, and Jo's own savings and pensions with what Chris left kept separate.

Open Jo and Chris's example in the planner, or open it on the Tax view, split by person. The example is invented, its growth rates are assumptions, and the value of investments can go down as well as up. The estimate is the arithmetic of the planner's simplified rules, not a calculation of tax anyone will owe; inheritance tax and estate planning are areas where people often take regulated advice.