Inheritance tax for married couples and civil partners

Inheritance tax

Inheritance tax for married couples and civil partners

By Ian Robinson

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Inheritance tax for married couples and civil partners

Married couples and civil partners can 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. To make a transfer use the HMRC form, 'Claim to transfer unused nil rate band: Schedule IHT402'.

Example

Transfers between married couples and civil partners are not subject to inheritance tax (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 seven 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 have double the allowance on your death. This applies even if your partner has already died, provided they died after 12 November 1974. For deaths that occurred before this see below. 

Inheritance tax rule changes 

In the 2015 Summer Budget, the chancellor, George Osborne announced a new transferable main residence allowance, which will gradually increase from £100,000 per person in April 2017 to £175,000 per person by 2020/21. This is in addition to the main nil-rate band. It will effectively raise the IHT-free allowance to £500,000 per person. Where married couples jointly own a family home and want to leave this to their children, the total IHT exemption will be £1m.     

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.

Restrictions on nil-rate band transfers

Inheritance tax was introduced in 1986, replacing Capital transfer tax- which originally replaced Estate duty. The degree to which transfers between spouses were tax-exempt differed under each system- giving rise to a system which still treats the estate of a deceased partner differently, depending on the date they died. In cases of doubt, it may be worth checking the exemption allowable with a tax consultant.     

  • If your partner died after 12 November 1974: After 12 November 1974 there was no limit to spouse exemption, unless the deceased was domiciled in the UK and the surviving spouse was not domiciled in the UK- when it was limited to £55,000. After 6 April 2013, the exemption is the inheritance tax nil rate band.
  • If your partner died between 22 March 1972 and 12 November 1974: During this period spouse exemption was limited to £15,000, so the amount of unused allowance you can claim is severely limited. 
  • If your partner died before 22 March 1972: If your husband or wife died before 22 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 until 1974

Estate Duty Limits: England, Scotland, Wales
Date of death Amount below which estate duty wasn't payable
On or before 28 August 1946 £100
Between: 29 August 1946 and 29 July 1954 £2,000
Between: 30 July 1954 and 9 April 1962 £3,000
Between: 10 April 1962 and 3 April1963 £4,000
Between: 4 April 1963 and 15 April 1969 £5,000
Between: 16 April 1969 and 30 March 1971 £10,000
Between: 31 March 1971 and 21 March 1972 £12,500
Between: 22 March 1972 and 12 November 1974 £15,000
 
Estate Duty Limits: Northern Ireland
Date of death Amount below which estate duty wasn't payable
On or before 28 August 1946 £100
Between: 29 August 1946 and 31 October 1954 £2,000
Between: 1 November 1954 and 3 July 1962 £3,000
Between: 4 July 1962 and 21 May 1963 £4,000
Between: 22 May 1963 and 3 June 1969 £5,000
Between: 4 June 1969 and 4 May 1971 £10,000
Between: 5 May 1971 and 21 March 1972 £12,500
Between: 22 March 1972 and 12 November 1974 £15,000

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 current rules, when people in this position die, their estate is only entitled to one tax-free allowance. The fact that these people can't use their deceased partner’s tax-free allowance could mean a much bigger inheritance tax bill for their heirs.

  • Last updated: April 2016
  • Updated by: Ian Robinson