Inheritance tax for couples: Transferable allowances and joint estates

Inheritance Tax (IHT) can have a significant impact on what you leave behind, especially for couples who want to ensure their loved ones benefit as much as possible. Understanding how the nil-rate band and residence nil-rate band work—and how they can be transferred between spouses or civil partners—is essential for effective estate planning. The rules are detailed, and the effect of IHT depends on your personal circumstances and how your estate is structured.

Current IHT Thresholds and Rates for Couples

Every individual benefits from a nil-rate band, which means the first £325,000 of your estate is not subject to IHT. If you leave your main home to your children or grandchildren, you may also benefit from the residence nil-rate band, which can add up to £175,000 to your tax-free allowance. For couples, these allowances can be combined and transferred, potentially allowing up to £1 million to be passed on tax-free if both bands are fully available and the home is left to direct descendants.

Anything above these thresholds is usually taxed at 40%. If you leave at least 10% of your net estate to charity, the rate on the remainder may be reduced to 36%. The residence nil-rate band is only available in certain circumstances and is subject to tapering for larger estates, so it’s important to check whether your estate qualifies.

How Transferable Allowances Work

If you are married or in a civil partnership, any unused nil-rate band and residence nil-rate band from the first spouse or partner can be transferred to the survivor. This means that when the second person dies, their estate can benefit from both sets of allowances. However, if the first spouse used some of their allowance (for example, by leaving part of their estate to someone other than their spouse), only the unused portion can be transferred. It’s important to keep records of how the first estate was distributed, as this will affect the calculation for the second death.

What Happens If the Home Isn’t Left to Direct Descendants?

The residence nil-rate band is only available if the main home is left to direct descendants, such as children, stepchildren, adopted or foster children, or grandchildren. If the home is left to someone else, this additional allowance is lost. For estates worth more than £2 million, the residence nil-rate band is reduced by £1 for every £2 over the threshold, and can be lost entirely for very large estates.

Key IHT Exemptions for Couples

Anything left to a spouse or civil partner is exempt from IHT, as long as both are domiciled in the UK. This means that on the first death, the surviving spouse can inherit everything tax-free. Gifts to registered charities are also exempt. Each tax year, you can give away up to £3,000 without IHT implications, and this can be carried forward for one year if unused. You can also give up to £250 per person per year to any number of people, provided they have not also received your annual exemption. Regular gifts made from surplus income, rather than capital, are exempt if they do not affect your standard of living. Good records should be kept to show these were made from income, as HMRC may request evidence.

However, some gifts may still be subject to IHT if you die within seven years of making them, or if you continue to benefit from the asset—a situation known as a “gift with reservation of benefit.” For example, giving away your home but continuing to live in it rent-free would not remove it from your estate for IHT purposes.

Common Pitfalls and Ambiguities

• Not realising that only the unused portion of allowances can be transferred if the first spouse used some of their nil-rate band.

• Overlooking the residence nil-rate band by not leaving the home to direct descendants.

• Failing to keep records of gifts, which can make it difficult for executors to claim exemptions.

• Assuming all jointly owned assets are automatically exempt or that all gifts are outside the estate after seven years, without considering the “gift with reservation” rules.

• Not reviewing your estate plan after major life changes, such as marriage, divorce, or the birth of children or grandchildren.

Worked Example

Suppose a married couple’s combined estate is worth £950,000, including a family home. If the first spouse leaves everything to the survivor, no IHT is due at that stage. When the second spouse dies, if the home is left to children and both nil-rate bands and both residence nil-rate bands are available, up to £1 million can be passed on tax-free. If the estate is larger, or if some allowances have already been used, IHT may be due on the excess at 40%.

Why Planning Matters

IHT rules are detailed and change frequently. The effectiveness of planning strategies depends on your assets, family situation, and how gifts or trusts are structured. If your estate is close to or above the thresholds, it’s important to keep up to date with the latest rules and consider the impact of any changes in your circumstances.

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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.