Inheritance tax after the second parent fies: What children need to know

When the second parent passes away, families often face the most significant inheritance tax (IHT) decisions. This is the point at which the combined value of both parents’ estates is assessed, and the largest IHT bill is usually due. The rules around allowances, exemptions, and estate valuation can feel overwhelming, but understanding them can help you avoid costly mistakes and make the most of the reliefs available.

How Inheritance Tax Works After the Second Death

For married couples and civil partners, assets can usually pass tax-free to the surviving spouse or partner when the first person dies. This is because anything left to a spouse or civil partner is exempt from IHT, provided both are domiciled in the UK. It’s only after the second death that IHT is typically assessed on the combined estate before it passes to children or other beneficiaries. At this stage, the value of the entire estate—including property, savings, investments, and personal possessions—is considered.

Nil-Rate Band and Residence Nil-Rate Band

Every individual has a nil-rate band, currently set at £325,000. This means the first £325,000 of the estate is not subject to IHT. If the main home is left to direct descendants (children, stepchildren, adopted or foster children, or grandchildren), the estate may also benefit from the residence nil-rate band, which can add up to £175,000 to the tax-free allowance.

For couples, any unused portion of these allowances from the first death can be transferred to the second estate. This means, in the best-case scenario, up to £1 million can be passed on tax-free if both nil-rate bands (£325,000 each) and both residence nil-rate bands (£175,000 each) are fully available and the home is left to direct descendants.

However, the residence nil-rate band is reduced by £1 for every £2 that the estate exceeds £2 million. This means that for estates worth £2.35 million or more, the residence nil-rate band is lost entirely. Not all estates will qualify for the full amount, so it’s important to check your family’s circumstances.

Calculating the Tax Due

Anything above the combined allowances is usually taxed at 40%. For example, if the total estate is £1.2 million and the full £1 million in allowances is available, IHT would be due on £200,000. If at least 10% of the net estate is left to charity, the rate on the remainder may be reduced to 36%.

The calculation can become more complicated if gifts were made in the seven years before death, or if there are jointly owned assets or foreign property involved. Gifts made within seven years of death may be subject to IHT, and taper relief may apply to gifts made between three and seven years before death.

Common Misunderstandings and Pitfalls

• Assuming everything is tax-free: Many people believe that because assets passed tax-free to the surviving spouse, there will be no tax when the second parent dies. In reality, IHT is often due at this stage.

• Not understanding transferable allowances: If the first parent used some of their nil-rate band (for example, by leaving assets to someone other than their spouse), only the unused portion can be transferred.

• Overlooking the residence nil-rate band: This extra allowance is only available if the home is left to direct descendants and can be lost if the estate is too large or the property is not passed on in the right way.

• Gifts and reservations of benefit: Gifts made within seven years of death may still be counted for IHT, especially if the parent continued to benefit from the asset (such as living in a gifted home rent-free). This is known as a “gift with reservation of benefit.”

• Not keeping records: Executors must be able to show how the value of the estate and any gifts were calculated. HMRC can ask to see records for up to 20 years after IHT is paid.

Practical Example

Suppose both parents’ estates are worth £900,000 in total, including a family home. If both nil-rate bands and both residence nil-rate bands are available, up to £1 million could be passed on tax-free to the children. No IHT would be due in this case. If the estate is larger, or if some allowances have already been used (for example, if the first parent left part of their estate to someone other than their spouse), IHT may be due on the excess at 40%.

If the estate is £1.3 million and only £900,000 in allowances are available, IHT would be due on £400,000, resulting in a tax bill of £160,000.

What Children Should Do

• Check the available allowances: Review whether both nil-rate bands and residence nil-rate bands can be claimed. You may need to provide evidence of the first parent’s unused allowances.

• Gather records: Executors will need details of gifts, property ownership, and any previous use of allowances. Keep copies of the will, signed IHT forms, valuations, and final accounts.

• Consider the impact of recent gifts: Gifts made within seven years of death may affect the tax bill. Taper relief may reduce the tax due on gifts made between three and seven years before death.

• Seek clarity on property ownership: Jointly owned or foreign assets may be subject to different rules. If the estate includes a farm or business, special reliefs may apply.

• Keep records for at least 20 years: HMRC can request to see how you calculated the estate’s value and any tax paid.

Why Planning Matters

The rules around IHT after the second parent dies are detailed and can change. Failing to plan or keep good records can result in a higher tax bill or missed reliefs. Reviewing the estate plan after major life events—such as marriage, divorce, or the birth of grandchildren—can help ensure allowances are used effectively.

Inheritance tax can feel daunting, but understanding the process and the reliefs available can make a real difference to what your family inherits. If you’re dealing with the estate of a second parent, taking the time to check the rules and gather the right information is a wise step.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances and the evidence available.