Inheritance tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died. It’s a significant concern for many people, particularly married couples who are planning their finances and estates for the future. Understanding how inheritance tax works for married couples can help you plan more effectively and potentially reduce the amount of tax your estate will have to pay.
What is Inheritance Tax?
In the UK, inheritance tax is levied at a rate of 40% on the value of an estate that exceeds a certain threshold. As of the 2024/25 tax year, this threshold, known as the "nil-rate band," is £325,000. Any part of an estate exceeding this amount is subject to IHT.
However, there are several exemptions and reliefs available that can reduce or eliminate the amount of inheritance tax due, particularly for married couples.
The Basics of Inheritance Tax for Married Couples
One of the most important provisions for married couples (and civil partners) is the ability to pass on their estate to each other free of inheritance tax. This means that when the first partner in a marriage or civil partnership dies, the surviving partner does not have to pay inheritance tax on the estate they inherit from their deceased spouse or partner.
Transferring the Nil-Rate Band
When the first spouse or civil partner dies, any unused portion of their nil-rate band can be transferred to the surviving spouse or civil partner. This means that the surviving partner can have a nil-rate band that is double the standard amount, effectively increasing their threshold to £650,000.
For example, if the first spouse leaves their entire estate to the surviving spouse, their entire nil-rate band remains unused. Upon the death of the surviving spouse, their estate can benefit from their own nil-rate band of £325,000 plus the unused £325,000 from their deceased partner, totalling £650,000.
The Residence Nil-Rate Band
In addition to the standard nil-rate band, there is also an additional threshold known as the residence nil-rate band (RNRB). The RNRB applies to estates that include a residence left to direct descendants (children or grandchildren). As of the 2024/25 tax year, the RNRB is £175,000.
Like the nil-rate band, the RNRB can also be transferred between spouses or civil partners. This means that a couple could potentially leave a combined estate worth up to £1 million without incurring inheritance tax, provided that they meet the conditions for the RNRB.
Potential Pitfalls
While the provisions for married couples can significantly reduce the inheritance tax burden, there are some potential pitfalls to be aware of:
Jointly Owned Assets: If assets are owned jointly and pass automatically to the surviving spouse, they are not considered part of the deceased’s estate. This means that the nil-rate band might not be used, and the opportunity to transfer it could be lost.
RNRB Restrictions: The RNRB only applies if you are passing on a home to direct descendants. If you do not have children or grandchildren, or if your estate is large enough to reduce or eliminate the RNRB, you may not benefit from this additional relief.
Estate Planning Mistakes: Without careful planning, it’s possible to unintentionally trigger inheritance tax, particularly if assets are not structured properly or if gifts made during a person’s lifetime are not accounted for correctly.
How to Minimise Inheritance Tax for Married Couples
There are several strategies that married couples can use to minimise the inheritance tax liability on their estate:
Use Lifetime Gifts: You can give away up to £3,000 each year without it being added to the value of your estate for inheritance tax purposes. Gifts of any amount can also be made to your spouse or civil partner free of IHT.
Trusts: Placing assets in a trust can help to reduce the size of your taxable estate, though trusts can be complex and require careful planning.
Make Use of Exemptions and Reliefs: Ensure that you are making full use of all available exemptions and reliefs, such as the agricultural and business property reliefs, where applicable.
Review Your Will: Regularly reviewing and updating your will can ensure that your estate is distributed in the most tax-efficient manner. Consider professional advice to ensure that your will is structured in a way that minimises IHT.
Consider Professional Advice: Inheritance tax is a complex area, and the rules can change over time. Seeking advice from a financial planner or tax specialist can help you navigate the intricacies of inheritance tax and ensure that your estate planning is as efficient as possible.
Final Thoughts
For married couples, understanding the intricacies of inheritance tax is crucial for effective estate planning. By making full use of the exemptions, reliefs, and allowances available, it’s possible to significantly reduce or even eliminate the inheritance tax liability on your estate.
However, because of the complexities involved, particularly with the transfer of nil-rate bands and the use of the residence nil-rate band, professional advice is often essential.
Proper planning can ensure that more of your wealth is passed on to your loved ones rather than being lost to inheritance tax, giving you peace of mind about your financial legacy.
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