Inheritance Tax – are there any benefits for Married Couples and Civil Partners?

Inheritance Tax – are there any benefits for Married Couples and Civil Partners?

Inheritance Tax is currently paid at the rate of 40% on the remaining value of a deceased’s estate above the current ‘nil rate band’ personal allowance of £325,000.  So, for example, if an individual’s estate was valued at £500,000 – £325,000 would not be liable to Inheritance tax – but £175,000 of the estate could be taxable at 40%, which would mean a potential payment of £70,000 to HMRC!

However, there are benefits if you are married or in a civil partnership.  Firstly, transfers on death between spouses or civil partners domiciled in the UK are usually not subject to Inheritance Tax.

Furthermore, if the whole of the estate of the first to die is left to the husband, wife or civil partner in its entirety, then on the second death (when the estate may become liable to Inheritance Tax) the first nil rate band can be transferred and added to the second nil rate band doubling the Inheritance Tax exemption from £325,000 to £650,000.

Even where the first spouse or civil partner has left a gift to another individual, the remainder of their nil rate band can be transferred.  For example, if a legacy of £25,000 is made to a friend by the first to die and the rest of their estate passes to their spouse or civil partner – £25,000 will be deducted from their available nil rate band, but the remaining £300,000 can be transferred to their spouse or civil partner on the second death; still giving them a total £625,000 Inheritance Tax exemption.

Another advantage is the main residence nil rate band, which is also transferable between spouses and civil partners.  This allowance is available where property is left to a direct descendant (e.g. children and grandchildren), and the current rate for 2021/22 is £175,000 per person.  Where married couples and civil partners jointly own their home and leave their estate to each other on the first death and then on the death of the survivor their property passes to their children, the combined ‘residence nil rate band’ allowance could be £350,000.

Therefore, if on the death of the surviving spouse or civil partner the combined residence nil rate band is available and is added to the combined personal nil rate bands, the potential total Inheritance Tax exemption is £1 million!

GoodyBurrett are here to help.  If you would like further advice regarding Inheritance Tax planning, please contact our Private Client Team at Colchester office on 01206 577676 or our Dunmow office on 01371 873277.

 

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