How can married couples make use of inheritance tax relief for their children?
- TBA
- May 22, 2024
- 4 min read
In this day and age, more and more people are choosing not to get married.
However, in terms of tax, married couples can enjoy many tax advantages, especially when concerning inheritance tax.
Currently, individuals are required to pay inheritance tax when they inherit property exceeding £325,000.
1. Tax relief between couples
Married couples usually do not need to pay any inheritance tax when transferring wealth between them.
The unused portion of the tax-free allowance of the first deceased partner can be added to the estate of the surviving partner, thus increasing the threshold for taxation.
When it comes to inheritance tax for married couples and civil partners, typically no fees are required. If you are married or in a civil partnership and your spouse or civil partner leaves their entire estate to you, regardless of its value, this provision applies.
2. Transferring tax allowances
Married couples can also transfer their individual tax-free allowances. Since 2007, a deceased partner or civil partner can transfer the unused proportion of their inheritance tax-free allowance to the surviving partner or civil partner.
This means that when you die, the unused inheritance tax-free allowance of your deceased partner can be transferred to your own unused allowance (£325,000). This can be either their entire unused £325,000 allowance, or any portion thereof.
There are two scenarios:
In the first scenario, if the deceased partner leaves their entire estate to the surviving partner, the tax-free allowance will be fully transferred to the spouse. After the transfer, your own tax-free threshold will double, reaching a total of £650,000.
In the second scenario, if the deceased partner leaves part of the estate to other beneficiaries, using a portion of their tax-free allowance, you can only claim that part of the £325,000.
For example, Mr. C dies leaving an estate worth £600,000. He leaves £130,000 to his children and the rest to his wife, Mrs. A. At the time, the personal tax-free threshold is £325,000. So, the £130,000 left to the children would use up 40% of the threshold (£130,000 ÷ £325,000 x 100), leaving 60% of his personal tax-free allowance unused.
When Mrs. A dies, her personal tax-free threshold remains at £325,000. So, her available threshold will increase by the percentage of the unused allowance (60%), reaching £520,000 (£325,000 x 60% + £325,000).
If Mrs. A’s estate is valued at less than £520,000, the inheritors of these properties will not have to pay inheritance tax, but the portion exceeding £520,000 will be subject to inheritance tax.
3. Main residence exemption
Married couples can also benefit from the Main Residence Nil Rate Band (MRNRB). This band supplements the existing individual inheritance tax-free allowance, reducing the estate’s value subject to the full 40% tax rate. This rule applies to people who died on or after the 6th April 2017.
Under this rule, if your estate includes a property left to direct descendants (children, grandchildren, and stepchildren), which was your main residence at some point during your life or intended to be, you can apply for the MRNRB.
From April 2020, the MRNRB increased to £175,000, and for the tax year 2023/2024, it remains the same.
From 2024 onwards, this band will increase in line with the Consumer Prices Index and inflation. This means the inheritance tax threshold you can claim rises to £500,000 (£325,000 + £175,000). If a married couple jointly owns a family home and wishes to leave it to their children, the total exempted inheritance tax will be £1,000,000.
Please note that if this allowance is transferred between spouses, the value of the transferred allowance will depend on the second spouse’s death rather than the first.
4. How can married couples utilise wills?
Before the current inheritance tax rules came into effect, married couples could use wills to ensure that their tax-free allowances were not wasted.
Even though the latest inheritance tax rules have been introduced, wills can still be used to ensure that your wealth and assets are distributed according to your wishes after you pass away.
In a will, you can arrange to gift an amount or assets not exceeding the tax-free threshold to someone other than your partner when the first person dies. Alternatively, you can establish a trust in your will for the benefit of the surviving spouse.
However, not everyone needs these arrangements. For example, if it involves absolute trusts, these arrangements might disadvantage you. Additionally, if the tax-free allowance has been used up when the first spouse dies, any increase in the tax-free allowance will be lost, which might happen between the deaths of the first and second spouse.
5. Inheriting a partner’s ISA investment
In the UK, many people use ISAs for savings and investments. So, when someone dies, their estate includes all their money, property, real estate, and other assets, including the funds in their ISA accounts. Surviving spouses benefit from additional protection available from such accounts.
Since 2014, widowed civil partners and spouses can reinvest the investments and cash held in their deceased spouse’s ISA, allowing them to benefit from interest growth and dividends tax-free. This allowance is called the APS or Additional Permitted Subscription.
Please note that not every ISA provider allows this allowance. So, if you want to utilise this policy, it’s best to consult with the provider before transferring these additional deposits to ensure they accept the practice. If your service provider doesn’t allow it, you can opt to open an account with another provider that does.
6. What if a partner dies without leaving a will?
If your partner dies without leaving a will, the rules of intestacy apply. If you are in a civil partnership or marriage without children, they effectively leave all their estate to you, and you won’t have to pay any inheritance tax.
By law, the first £250,000 of the estate will go directly to the spouse, and the rest will be split in half, with half going to the spouse and half to the children. Similarly, if your half is tax-exempt, but the other half is taxable, and their tax-free allowance is used up, you will use their portion of the tax-free allowance.
It’s essential to note that if you are not in a civil partnership or married, the rules of intestacy in will inheritance will not apply to you, and you will not have inheritance rights.