Are Inheritance Tax Rules Different If You're Married?

05 March 2018

When it comes to Inheritance Tax, every individual is entitled to an allowance which can be used on their Estate. This means that they can transfer assets up to a certain value without triggering Inheritance Tax. This is called the 'nil-rate band' which is currently set at £325,000 for individuals. For married couples or those in a civil partnership, there are additional Inheritance Tax advantages which they can benefit from.

Spouse Exemption

Subject to a limit of £1m, transfers and Estates passed on to a surviving spouse or civil partner are fully exempt from Inheritance Tax. Therefore, if someone died and left their whole Estate to their spouse, their Estate would not be subject to Inheritance Tax.

It is worth mentioning that before 1972, spouse exemption did not exist. Between 1972 and 1974, this was limited to £15,000 for assets passing between spouses.

Transferable Nil Rate Band

One of the advantages for married couples is that, since 2007, it has been possible for individuals to use their pre-deceased spouse's nil-rate band as long as it has not already been used on their Estate. Any proportion of allowance that was not used on the first death can be used on the second death. This would result in a maximum double tax-free allowance of £650,000.

For instance, Mary and Bob are married. Mary dies, leaving everything she owns to Bob. Because of spouse exemption, no Inheritance Tax is payable and none of Mary’s nil-rate band needs to be used.

When Bob dies, his Estate is worth £500,000. Bob’s individual nil-rate band is £325,000, meaning anything over this would be liable for Inheritance Tax. However, as Mary’s nil-rate band of £325,000 was not used, this is transferred to Bob’s Estate, increasing his nil-rate band to £650,000. Because of this, Bob’s Estate is not liable for Inheritance Tax.

Claiming the transferable nil rate band can be done by filing the HMRC IHT 217 form.

Care should be taken with regards to any lifetime gifts that were made in the seven years prior to the date of death. These potentially exempt transfers becoming taxable if made within seven years of death and they reduce the nil-rate band allowance.

For example, if the first spouse to die left their Estate to their spouse, however, made gifts worth £125,000 two years before death, only £200,000 of their nil-rate band is then available to be used on the second death Estate. It is worth mentioning that each person is entitled to give gifts of up to £3,000 per year without these being taxable. A maximum of two annual exemptions can be used towards the same transfer (meaning it is possible to make a gift of up to £6,000).

Residence Nil-Rate Band

This allowance is added on top of the already existent nil rate band, however, there are certain criteria which must be met in order to claim this.

As its name suggests, the residence nil-rate band is a specific exemption for the deceased's home. This can be applied if the property was their residence at the date of death and is being transferred to children or other 'direct descendants'. Only one home will qualify for the allowance and, therefore, if the deceased owned more than one property, the residence nil-rate band can only be used on one of the properties.

This new allowance came into effect in April 2017 and increased the tax-free amount that can be passed on by an individual by £100,000. This will further increase to £175,000 by 2020/21.

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