Widowed or widower? Your estate can still benefit from your deceased spouse’s 0% tax allowances even if they are long gone….
It’s usual for a spouse’s entire assets to pass to the surviving spouse on first death and there is no Inheritance Tax (IHT) between spouses or civil partners. Currently we all have an allowance (the Nil Rate Band or NRB) of £325,000 at 0% tax. Any such allowance that has been unused by the deceased spouse/civil partner at time of death can be transfered to the surviving spouse. This can mean for the surviving spouse that up to an extra £325,000 is taxed at 0% on top of your own similar allowances, if no gifts were made in previous years.
Additionally there is a further allowance (the Residence Nil Rate Band or RNRB) of £150,000 (and is due to increase to £175,000 in April 2020) each which only applies to property value and only if that value passes down to children, step children or grandchildren (not to more distant relatives like nephews and nieces). This means a full £1 million can pass IHT free for a married couple or civil partnership. 2019 General Election notwithstanding!
Tax Case Study
A married couple own a house worth £1m and they have other assets worth £0.5m. Total estate value is £1,500,000.
Spouse 1 dies:
The whole value of Spouse 1’s half of the estate (£750,000) can pass to the survivor (Spouse 2) and Spouse 2 doesn’t have to pay any inheritance tax.
Spouse 2 dies and the house and monies pass to their children:
Spouse 2’s estate can claim both sets of allowances (£325,000 x 2 plus £125,000 x 2 = £900,000) taxed at 0%. The remaining £600,000 of the original £1,500,000 estate would incur IHT tax at 40% i.e. £240,000. (for simplicity’s sake, funerary expenses and annual gifting deductions have been ignored).
IF in the previous 7 years a gift had been made by Spouse 1 to someone of £100,000 (whether into trust or directly) then the NRB of Spouse 1 would be reduced by that amount to £225,000. In turn this reduces the amount taxed at 0% on the death of spouse 2 and IHT increases to 40% x £700,000 = £280,000
Of course, it’s never that simple (which is why we are in business…) and the nasty tax man will keep coming back every generation if you’re not careful.
But in reality he can be the least of your worries. A re-marriage by spouse 2 after the death of spouse 1 can mean the children losing the lot without planning. Or a child’s divorce can knock a massive hole in the estate!
If you have any questions about your estate or family situation, please feel free to contact us for a confidential, no obligation chat on 01635 896907