Inheritance tax planning: Can I Pass An Allowance to my partner? by Darrell Mark Eaden

In this article, Darrell Mark Eaden explains the basics of inheritance tax, as well as the current limits and when those came into play. I’ll also talk a little about what happens when heirs inherit an estate that falls over the current threshold.

Inheritance tax can be a tricky topic to navigate. What are the limits? Who is responsible for paying what? And can inheritance tax limits be passed on to your husband, wife, or spouse?

What is inheritance tax?

According to current Gov.uk definitions, inheritance tax is any tax on the estate of someone who has died. Usually, this estate is not subject to inheritance tax if either the value of this estate falls below the £325,000 threshold — or you leave everything above that threshold to your spouse, civil partner, a community amateur sports club, or a charity.

There are certain situations where this threshold increases, which we’ll talk about in a little more detail later on.

What are inheritance tax rules for married couples and those in a civil partnership?

If you’re married or in a civil partnership, it means you can transfer your allowance to your wife or husband without being subject to IHT. This means that the first partner to die leaves their estate to the surviving partner, with no deductions.

However, it’s important to know that if your husband or wife has left bequests to others within seven years of their death, the recipient’s estate may be subject to IHT if it’s substantial enough to use up some of the nil-rate band.

What is a nil-rate band?

The nil-rate band is a term used within tax legislation in the UK. It establishes a threshold below which any gift or estate value is subject to zero inheritance tax. Once the bequest goes above the nil-rate band, inheritance tax is payable.

How the Nil-Rate Band Works for Couples

Couples are usually able to inherit tax-free from their civil partner or married spouse. They can also apply to gain their partner’s unused nil-rate band — meaning the amount the surviving partner can leave to loved ones untaxed is greater than it would be with their nil-rate band alone.

Inheritance tax and property: how the law affects married couples

In April 2017, a rule came into play meaning people can leave more if the estate includes a property that is being left to immediate relatives (children, stepchildren, and grandchildren) — increasing it from £150,000 to £175,000. This means the IHT is raised to £500,000 in total for most people.

If your estate is worth less than you’re threshold, and you’re married or in a civil partnership, unused threshold can be added to your partner’s threshold when you die, taking their threshold up to £1 million.

Using a will for inheritance tax planning

Before current rules came in, most people used wills to make sure tax-free allowance was used up. This is no longer necessary. In fact, it may even put you at a disadvantage if a discretionary trust is involved.

If you use all your tax-free allowance at the first death, you miss out on tax-free allowance increases that may happen between the first death and the second.

The £175,000 transferable main-residence allowance can only be used when leaving the property to a child or grandchild or inheritance trust. It might be more beneficial to use your husband, wife, or partner’s tax-free allowance to boost your own nil-rate band.

Transfers for married couples: What you need to know

Inheritance tax was introduced in 1986. Transfer rules between spouses and partners differ from what they were before, meaning estates will be taxed differently, depending on the date of the partner’s death. If in doubt, it’s worth speaking to a tax consultant for advice.

• If your partner died after November 1974, there is no limit to spouse exemption unless the deceased had their home in the UK and the surviving partner didn’t. Then, it’s limited to £55,000.
• If your husband or wife died after April 6 2013, the exemption is the inheritance tax nil-rate band.
• If your partner died between 22 March 1972 and 12 November 1974, spouse exemption was limited to £15,000.
• If your partner died before 22 March 1972, estate duty (rather than inheritance tax) was in force. No transfers could be made tax-free between husband and wife up to that date.

Surviving partners who paid estate duty on the deceased’s estate are treated as having used up any tax-free allowance due, despite having paid tax, and despite no tax-free amount being passed on.

Under current rules, when someone in this position dies, their estate is restricted to one tax-free allowance. This could mean heirs have a bigger inheritance tax bill to pay.

Paying Inheritance Tax

Tax owed on an estate will need to be calculated by the executors of the will. This will include all assets (property, cash, and gifts) made within the last seven years. It’s the executor’s responsibility to pay what is owed within six months of the end of the month in which the person died.

Paying this tax might mean selling assets in the estate or cashing in savings accounts. If the funds are tied up in savings, it is possible to pay them back over 10 years, but there will be interest due on top of the IHT.

If you’d like to reduce the assets that need to be sold, you could consider taking out a lifetime insurance policy to cover it. Just remember to have it written ‘under trust’, or your heirs will end up paying IHT on the payout.

If you’d like to find out more about inheritance tax or have questions about the services and support we can offer, get in touch with Darrell Mark Eaden today.

Originally published at https://darrellmarkeaden.co.uk on September 4, 2021.