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Ask an expert: ‘My father died in 1989, leaving everything to my late mother. What’s the inheritance tax allowance on her estate?’

Find out how the inheritance tax 'nil-rate band' works for married couples

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Q. I am sorting out my late mother’s affairs and want to clarify her inheritance tax allowance. My father died in 1989, leaving her everything. What is the total inheritance tax allowance on her estate?

Submitted via the Which? Money Helpline.

A. We get lots of questions about inheritance tax from children who are dealing with an estate when one parent has passed away decades after another.

People often ask whether the inheritance tax allowance in the year the first parent died applies to the overall amount that can be passed on free from inheritance tax today.

Let’s start with the basics. The amount that an individual can pass on free of inheritance tax is known as the ‘nil-rate band’. In 2017-18, this is £325,000. Anything above this amount is taxed at 40%.

Back in 1989-90, when your father died, the nil-rate band was £110,000. The chart shows how it has changed over the years.

However, the amount that could be passed on tax-free in 1989 is actually irrelevant when working out the total inheritance tax allowance on your mother’s estate – it’s the proportion of the allowance your father had used up when he died.

If he had given away £40,000, for example, when he died, he’d have used up 36% of his nil-rate band (£40,000/£110,000).

Any unused nil-rate band is transferred over to spouses and civil partners. But the remaining proportion of his unused allowance at the time of death is applied to the current nil-rate band. So, the amount that would be transferred to the estate in the example above would be 64% of £325,000, or £208,000.

However, as your father had not made any previous chargeable gifts or transfers and left his entire estate to your mother, his nil-rate band was unused, so 100% of it can now be transferred to your mother’s estate and added to her £325,000 nil-rate band.

This results in a total inheritance tax-free allowance of £650,000.

What happens if a property is included in the estate?

What’s more, as your mother has left the family home to you, her estate also qualifies for the new property inheritance tax allowance, called the ‘residence nil-rate band.’ This is currently £100,000, and rises every year until 2020, when it will reach £175,000.

The table below shows how this works and the total amount that can be passed on inheritance tax-free in a few years’ time.

Tax year Standard nil-rate band Residence nil-rate band Total inheritance-tax free allowance
2017-18 £325,000 £100,000 £425,000
2018-19 £325,000 £125,000 £450,000
2019-20 £325,000 £150,000 £475,000
2020-21 £325,000 £175,000 £500,000

As your mother passed away in the 2017-18 tax year, an additional £100,000 can be added to her nil-rate band, increasing the total allowance to £750,000.

There’s more. The government’s rules state that, for married couples and civil partners, any unused residence nil-rate band can be transferred when ‘the surviving spouse or civil partner dies after 5 April 2017’ and that ‘it doesn’t matter when the first of the couple died, even if the death occurred before the additional threshold was available.’

In your case, it means that your father’s residence nil-rate band can also be added to the overall inheritance tax allowance, increasing this further to £850,000.

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