Inheritance tax (IHT) is a tax levied on a deceased person’s estate. Every person – whether married or unmarried – is entitled to an allowance on which IHT is not due. As of 2021 onwards, this allowance is frozen at £325,000. Any part of a deceased person’s estate that exceeds this threshold is likely to be taxed at 40% . Inheritance Tax for Married Couples and civil partners, however, the rules are different – meaning that it’s possible for a surviving spouse to drastically reduce their inheritance tax bill (or avoid paying IHT at all).
Basics of Inheritance Tax for Married Couples
What Is the Nil-Rate Band?
The threshold below which no inheritance tax is owed is known as the nil rate band. For most person this amount is set at £325 000 from 2021 onwards. when it comes to married couples any unused portion of this allowance can be transferred to the surviving spouse effectively doubling the tax free amount.
Tax-Free Transfers Between Spouses: Advantage
When a couple decides to get married or enter into a civil partnership, the potential tax advantages are probably not a key consideration – but there are some huge bonuses to be enjoyed! When it comes to inheritance tax, for instance, marriage offers a significant benefit in terms of tax-free transfers.
As mentioned above, there is a level before which any inheritance tax is due – and every person is able to benefit from this tax-free allowance, which is known as the nil-rate band. However, if a member of a married couple dies without having used a portion (or all) of the nil-rate band, this can be transferred to their surviving spouse. As transfers between married couples and civil partners are exempt from IHT charges, this can substantially increase the amount that a surviving spouse can inherit without having to pay any inheritance tax.
Understanding Potential IHT Charges
It’s worth remembering, though, that it can’t be assumed a deceased partner’s entire tax-free allowance is available; gifts made within seven years of their death – or other actions (such as bequests) – can attract IHT. The charges that will be levied vary depending on individual circumstances and the size of the estate, and a qualified tax adviser can provide guidance regarding the options available to you – either in terms of estate planning or in the event of a loved one’s death.
Property and Inheritance Tax for Married Couples
In April 2017, a new allowance came into effect – the ‘transferable main residence allowance’ – which increases the amount (in terms of property) that can be passed on, tax-free, when a person dies. This is set to increase in phases over the next few years:
- 2017/18: £100,000 per person
- 2018/19: £125,000 per person
- 2019/20: £150,000 per person
- 2020/21 onwards: £175,000 per person
Residence Nil Rate Band still at £175,000 per person in 2024. When combine with the main RNRB of £325,000. This means that up to £500,000 per person can be passed on tax free provided a residence is part of the estate and is left to direct descendants. For civil partners or married couples this can amount to £1 million tax free.
How Married Couples Can Maximize Property Inheritance?
Inheritance Tax for Married Couples and Civil Partners benefit from a few extra perks here, too. If an individual’s spouse dies, the surviving partner can benefit from a transfer of their main residence allowance as well as the main nil-rate band allowance – increasing the amount that can be inherited without paying IHT. Moreover, if a home is jointly owned by a married couple and they wish to leave this to their children, the total IHT exemption is raised to £1m.
Calculating the Main Residence Allowance Transfer
It is important to note though, that if the main residence allowance is transferred between spouses, the value will be calculated according to when the second partner dies (not the first).
Inheritance Tax for Married Couples: Restrictions and Considerations
Unfortunately, though the above may seem straightforward, the way that the rules have changed over the years (and the number of times legislation has been altered) means that, even for married couples, inheritance tax affairs can be complicated – depending on when the spouse in question died.
First introduced in 1986, inheritance tax was established to replace capital transfer tax (which, in turn, had been introduced to replace estate duty). The exemptions and benefits that are available depend on which system was in place when the relevant individual died.
Maximising Inheritance Tax Efficiency
Timely estate planning is crucial to minimising Inheritance Tax (IHT) liability. Consider exploring options such as setting up trusts making lifetime gifts or other strategic tax planning methods to reduce the taxable value of your estate. These strategies can help preserve more of your wealth for your beneficiaries and ensure that your estate is managed according to your wishes. Consulting with a qualified tax adviser early on can provide you with good advice and peace of mind.
Important Dates to Remember
- If your partner died before 22 March 1972. At this time, estate duty was in force (rather than IHT) – and no tax-free transfers were allowable between husband and wife. Estates valued under a certain amount (the threshold varied, depending on the date of death) were not taxable, but estates that exceeded the threshold were subject to tax on the entire value of the estate.
- If your partner died between 22 March 1972 and 12 November 1974. Spouse exemption was introduced during this time, but it was limited to £15,000.
- If your partner died after 12 November 1974. From 12 November 1974 until 6 April 2013, spouse exemption was limitless. The only exception to this rule was if the surviving spouse was not domiciled in the UK, but the deceased spouse was (in these cases, exemption applied up to a value of £55,000). From 6 April 2013, the allowance was changed to reflect the main nil-rate band.
- Changes From 6 April 2013 the exemption for transfers between a UK domiciled deceased spouse and a non domiciled surviving spouse was aligned with the main nil rate band. As of 2024 this band stands at £325,000. This allows the non domiciled surviving spouse to inherit up to £325,000 tax-free plus any unused portion of the nil-rate band from the first spouse estate.
Contact IBISS & CO for Expert Assistance
If you’re considering undertaking estate planning, or would like to discuss a current inheritance tax matter or inheritance tax for married couples and civil partners, don’t hesitate to give IBISS & CO a call on 0203 808 0999 or Book a free initial consultation. You can also Visit our nearest office to discuss your IHT concerns in detail We’re here to take the stress out of IHT, providing expert guidance and a friendly professional service.
