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: the nil-rate band (which is frozen at £325,000 until 2021). Any part of a deceased person’s estate that exceeds this threshold is likely to be taxed at 40 . 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).
Inheritance Tax for Married Couples: The Rules
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.
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.
Inheritance Tax for Married Couples: Property
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: from £125,000 per person in April 2018 to £175,000 per person by 2021. When the main nil-rate band is taken into account, it means that the tax-free allowance for inheritance tax will be £500,000 per person by 2021 (provided that a residence forms part of a deceased person’s estate).
Married couples 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.
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
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.
In all instances, it’s highly recommended that you consult with a chartered tax consultant before committing to any plans concerning your – or a loved one’s – estate. They will be able to advise you on the exemptions that apply for the relevant dates, as well as discussing your individual situation in detail. However, here are some of the main things to consider:
- 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
If you’re considering undertaking estate planning, or would like to discuss a current inheritance tax matter, don’t hesitate to give IBISS & Co a call on 0203 808 0999. We’re here to take the stress out of IHT, providing expert guidance and a friendly, professional service.