Marriage comes with its own pros and cons in different circumstances. However, when it comes to inheritance tax, being spouses makes you entitled to certain benefits.
If you’re married or are in a civil partnership, you’ll find that there are some tax advantages you should be aware of. For example, there are some significant benefits when it comes to inheritance tax for married couples (or civil partners).
Usually, transfers of the tax free allowance between civil partners and married couples aren’t subject to IHT (inheritance tax). This means that if the husband or wife dies and leaves their whole estate to their partner, the inheritance will be tax free.
Furthermore, since none of the partner’s residence nil rate band will likely have been used, this amount can be added to that of the surviving spouse or civil partner. This will effectively double their inheritance tax threshold.
It’s important to note, though, that if one partner leaves gifts in their will to others (or gifts made during the last seven years of their life), it’s possible that the value of their estate could be high enough to be subject to an inheritance tax bill. It may also use up all or some of their nil rate band.
How is the nil rate band applied?
When it comes to inheritance tax for married couples and civil partners, there is usually no need to pay inheritance tax. This applies if you’re married or in a civil partnership and your spouse or civil partner leaves their estate entirely to you, whatever the estate is worth.
Although typically inheritance tax is levied on any part of your estate over the first £325,000 in value, inheritance tax for married couples doesn’t take the threshold into account, so there’s no inheritance tax to pay as the surviving spouse or partner in such cases.
If the partner to die first leaves some of their estate to other beneficiaries, though, you can only claim part of that £325,000.
When you die, your late partner’s inheritance tax (IHT) nil rate band allowance can be transferred to your own unused £325,000. This may either be their full £325,000 entitlement if the entire amount remained unused or any unused portion of it. The transfer will allow your own tax exemption threshold to rise exponentially to a total of £650,000, so the entire value of your assets at the time of your death can be as much as this figure before inheritance tax will be levied.
This application of the nil rate band allowance applies in England and Wales when you inherit even if spouses or partners are already deceased as long as the half of the couple that died first passed away after 12th November 1974.
Do married couples pay inheritance tax on property and how is the main residence nil rate band applied?
If you’re part of a couple, you’ll not only benefit from the main tax free allowance but also the transferable main residence allowance, which was first introduced on 6 April 2017. This means that any person who is part of a couple can leave more than their sole £325,000 tax free allowance. This is so long as the estate’s assets include a property that is being left to a family member who is one of their direct descendants, e.g. stepchildren, children or grandchildren.
If you’re a married couple planning your wills jointly and own your family home together, you can leave it to these direct family members and have a total nil rate band of as much as £1 million before the beneficiary has to pay IHT to HM Revenue.
Note that when this allowance gets transferred between partners, its value will rely on the value in place when the second partner passes and not the figure in place at the time of the first death.
Can a will be used when planning for inheritance tax for married couples?
Traditionally, your will was used to ensure there was no wastage of the tax free allowance. Even though the latest inheritance tax rules have been introduced, using your will is still possible to ensure that your wealth and possessions are distributed in the way you desire after your death.
In your will, you can arrange for money or assets up to the amount of your tax free allowance to be given as a gift to somebody other than your partner when the first person dies. Alternatively, it can be passed into a trust that can be set up in the will, and from which the surviving spouse could benefit.
These arrangements, however, aren’t necessary for everyone. For example, they could put you at a disadvantage if a discretionary trust is involved. Also, if the tax free allowance is used up at the time of the first death, any increase will be lost to the tax free allowance, which could take place between the first and second partners’ deaths.
Are there any restrictions on married couples’ transfers?
Estate duty was replaced by capital transfer tax, which itself was replaced in 1986 by inheritance tax. In the past, the level at which transfers between couples were tax-exempt varied from today. This means that a surviving partner’s estate could be taxed differently depending on when their spouse died. It’s important to get some advice from an authorised and regulated financial adviser if your partner died some time ago to determine which rules were in place at that time.
What about inheriting ISAs from your spouse?
The estate of someone after their death includes all of their money, possessions, property and other assets. This includes money that is held in an ISA. However, surviving spouses can still benefit from the additional protection this type of account can offer.
As of 2014, bereaved civil partners and spouses have been permitted to reinvest the investments and cash held in an ISA belonging to their late spouse. This enables them to take the interest growth and dividends without paying tax on them. This allowance is known as an APS or Additional Permitted Subscription.
Not every ISA provider will allow this allowance to be used, so checking with your provider is important to ensure those additional deposits are accepted before you transfer them. If yours doesn’t permit it, you can open a different one that does permit it, even if part of your own ISA allowance has been used during the same tax year.
What if my partner passes away and has no will?
If your partner passes away and leaves no will, the rule of intestacy applies. If you’re in a civil partnership or marriage without children, they will effectively leave everything in their estate to you without you needing to pay any IHT.
The first £250,000 of the estate will pass to you. The rest will be divided in two, and half will go to you and half will pass to the children. Again, your half will be exempt from IHT, but tax will be levied on the remainder, and it will also use some of their nil rate band.
It’s essential to note that if you aren’t in a civil partnership or married, the intestacy rules of probate won’t apply to you, and you’ll have no right of inheritance. This is why it’s extremely important to draw up a will to protect both partners and speed up the probate process.
Taking professional advice
The rules surrounding IHT and probate can be complex, and thinking ahead to what will happen after you pass away couldn’t be more important. Drawing up a will is vital to ensure that you can gift your loved ones the items and gifts that you desire and that your executor will distribute your assets as per your instructions.
A financial adviser registered in England and Wales and regulated by the Financial Conduct Authority will be able to give you the best possible advice about whether or not your beneficiaries will be liable to pay IHT on inheriting your estate and how best to minimise their taxation burden.