Inheritance tax explained Rules for married couples and civil partners

New tax rules mean you can benefit from your partner

Rules for inheritance tax which took effect from October 2007 mean that married couples and civil partners can now make use of each other’s tax-free allowance without special tax planning.

Inheritance tax rules in practice

What this means in practice is that any proportion of the tax-free allowance that was not used when your husband, wife or civil partner died can be transferred to you as the surviving partner for use on your death. That proportion of the current tax-free amount will be available to you.

Example

Transfers between married couples and civil partners are not subject to IHT, so if the first partner to die leaves their entire estate to the other there is a strong chance that none of their nil-rate band has been used. Bequests to others (and lifetime gifts made within 7 years of death) attract IHT if the estate is large enough, however, so may use up some or all of the nil-rate band.     

For example, if bequests from the estate of your husband, wife or civil partner to individuals other than yourself total £162,500, and the tax free allowance is £325,000, only 50% or half of the tax-free allowance would be unused.

If the tax free allowance when you die is £400,000, you would have a tax free allowance of £400,000 plus the unused allowance, which will then be 50% of £400,000 or £200,000, making a total tax free allowance on your death of £600,000.

So, if no part of the tax-free allowance was used on the first death, then you will the have double the allowance on your death. This applies even if your partner has already died, provided they died after 21 March 1972 (see below).

If you used your will for inheritance tax planning

Before the current inheritance tax rules came in, a common way to make sure your tax-free allowance was not wasted was to use your will to arrange for assets or money up to the value of the tax-free allowance to be passed to someone other than your husband, wife or civil partner on the first death, or to be passed to a trust set up in your will and from which your spouse could benefit.

However, now that an individual’s tax-free allowance can be passed on, these arrangements are no longer necessary for most people and may even be disadvantageous.

This is because by using the tax-free allowance at the first death, you will lose out on any increase to the tax-free allowance that may occur between the death of the first partner and the death of the second partner.

If you have already set up your wills this way, go back to the firm that arranged this for you and ask their advice on how you should proceed in light of the new inheritance tax rules.

If your partner died before 21 March 1972

We’ve heard from several Which? members who won’t currently benefit from the new rules.

If your husband or wife died before 21 March 1972, Estate Duty, rather than inheritance tax was in force. Under Estate Duty rules up to that date no transfers could be made tax-free between husband and wife.

Estates valued at less than a certain amount (this differed depending on date of death), didn’t attract tax, but estates over this amount had to pay tax on the whole value.

For those living in England, Northern Ireland, Scotland or Wales, we’ve given the various rates below which no Estate Duty was charged in the tables below:

Estate Duty limits

Only one tax-free allowance can be used

Because of the way Estate Duty worked, people who paid Estate Duty on their late partner’s estate are treated as having used up any tax-free allowance due. This is despite the fact that tax was paid on the estate and in reality no tax-free amount was passed on.

Under the rules as they are currently drafted, when people in this position die, their estate is only entitled to one tax-free allowance. The fact that these people cannot use their deceased partner’s tax-free allowance could mean a much bigger inheritance tax bill for their heirs.

More on this...

• Take a look at our full guide to tax for older people
• For more on how couples are taxed, see our guide to tax and your partner
• For any tax problems, call our experts on the Which? Money Helpline