Inheritance tax is the term on everyone’s lips right now, following changes made to the tax in the 2024 Autumn Budget. Yet whilst farmers are affected and pensions set to be considered part of your estate by April 2027, the inheritance tax rate and allowance threshold have been effectively frozen until at least 2030—so where does that leave married couples?
Inheritance tax for married couples follows many of the same rules which apply to individuals and their estates, yet with some key differences in terms of threshold and tax exemptions—differences which can help you safeguard your savings for your loved ones.
Whether you’re currently in the difficult process of settling a partner’s affairs, or you and your spouse are just beginning to make plans for the road ahead, UWM’s guide to inheritance tax and married couples is specifically designed to help you.
What is inheritance tax?
The idea of an ‘inheritance tax’—a tax applied to the assets inherited when someone dies—has been around for a long time. In fact, a form of IHT was first introduced way back in 1796 to help fund the UK’s war against Napoleon! In its modern guise, however, inheritance tax came into being in 1986.
Inheritance tax is a tax designed, in effect, to break up the monopoly of wealth by a small elite by redistributing assets in excess of the threshold to the state, and thus in turn, to the people. Despite very many changes to the types and rules of ‘inheritance tax’ applied over the decades, this essentially remains the case. On average, only the UK’s wealthiest 4-5% of individuals and their estates are hit with inheritance tax when they die (i.e., roughly 1 in 25 deaths triggers inheritance tax).
Of course, when two estates are combined—as is the case in a UK marriage or civil partnership—the question of how inheritance tax works in the event of one or both partners’ deaths becomes key.
Inheritance tax for married couples: What you need to know
Inheritance tax and married couples go together like sunlight and solar panels: the combination can be extremely beneficial, but understanding how is complicated. In this section, we’ll do our best to explain in simple terms how inheritance tax works for the average married couple.
Ultimately there are two main scenarios in which UK inheritance tax (IHT) affects a married couple following the death of one of the spouses.
- The surviving spouse inherits all or part of the estate of their partner following the partner’s death. As the legally married spouse of the deceased, they are exempt from inheritance tax and so pay no tax on the wealth they inherit.
- The surviving spouse inherits the remaining ‘unused basic threshold’ of their partner’s inheritance tax allowance following the partner’s death. The surviving spouse is legally entitled to whatever remains of their partner’s allowance, up to 100%.
In essence, married couples who decide to transfer all or some of their assets to the surviving partner upon the other’s death do not pay inheritance tax. Similarly, married couples are allowed to transfer, tax free, any unused inheritance tax threshold from the deceased to the surviving partner.
What about inheritance tax for civil partnerships?
Civil partnerships—traditionally referring to the types of marriages available to same-sex couples—operate identically to marriages when it comes to inheritance tax. Unfortunately, the same cannot be said for ‘common law marriages’ or long-term cohabitation.
In other words, even if you’ve lived with your partner for 60 years and have several children together, unless you are legally married or in a civil partnership, you will not enjoy the same inheritance tax exemption benefits when one of you dies.
What about remarriages?
If a surviving partner decides to remarry later in life, the new marriage will not affect the tax-free assets nor the allowance which they inherited from their previous partner. Indeed, they may still inherit, tax free, all or part of their new partner’s estate should they also outlive this later marriage. A person may even be transferred additional ‘unused basic threshold’ from subsequent spouses, up to the maximum of two individuals’ worth of allowance.
Inheritance tax threshold: Married couples
The inheritance tax threshold is the amount of wealth above which inheritance tax is charged on a person’s estate. Every UK citizen is entitled to a basic IHT threshold of £325,000—hence why relatively few deaths actually trigger the tax.
Everyone is similarly also entitled to an additional tax-free threshold of £175,000 provided they bequeath their main home or primary residence to their children or grandchildren. This additional entitlement is known as the ’residence nil-rate band’, or ‘main residence’ band.
For married couples, the inheritance tax threshold is of utmost importance because of the tax advantages discussed in the previous section.
- If a spouse or civil partner leaves you their entire estate, then you can effectively ignore the thresholds as you will be exempted from paying inheritance tax on what you receive.
- In this scenario, the surviving spouse may also inherit all of their partner’s unused IHT threshold, essentially doubling their personal inheritance tax threshold to £650,000 (or up to £1M if they leave their main residence to their children or grandchildren when they die).
- If a spouse or civil partner leaves you some of their estate but gives some of it to others, then any amount given to others which exceeds the £325k threshold will be taxed at the standard IHT rate of 40%.
- In this scenario, the surviving spouse may still inherit their partner’s IHT allowance, but some of the allowance has already been used in transferring part of the estate to others.
Exploring inherited assets and exemptions: What gets taxed?
Valuing a person’s estate when they die can take many months. This is because an estate includes all of the assets a person owns—such as cash, stocks and other investments, mortgages and loans, property and material valuables—minus the person’s debts (which the estate is used to settle, and which can include funeral expenses).
As of April 2027, a person’s pension fund(s) and death benefits will also be considered a part of their estate.
We’ve already discussed the key inheritance tax exemptions for married couples. Other more general tax exemptions pertain to what happens with assets given to others after the deceased’s affairs have been settled.
For example, inheritance of a ‘main residence’ from a surviving spouse may be tax-free up to £350k; however, note that the sale of an inherited home can trigger Capital Gains Tax (CGT). Whilst on the other hand, disposal of an inherited ‘second home’, or indeed disposal of a second home through inheritance is not subject to any inheritance tax exemptions.
How to calculate inheritance tax for married couples
To calculate the inheritance tax your loved ones may be charged when you and/or your spouse or civil partner dies is key to determining whether you should be looking for ways around IHT. To calculate your estate’s potential bill, you need to know the value of your estate, your remaining unused threshold, and the total amount of any debts you or your partner owes.
Let’s take a look at a few inheritance tax example calculations for married couples to help make calculating your own end-of-life finances that much easier.
Example one: Inheriting a spouse’s entire estate
Dev’s estate is valued at £1.5M when he dies, with debts totalling £300,000, making the true value of his estate £1.2M. Dev leaves 100% of the estate to his spouse Priti. Because of the rules surrounding inheritance tax and married couples, Priti’s inheritance is exempt from taxation, and so she receives the full £1.2M in assets tax-free. Priti may also inherit Dev’s unused basic threshold (£325k plus £175k ‘residence nil-rate’), increasing her inheritance tax threshold to £650,000–£1,000,000, depending on whether or not she leaves her main home to her children or grandchildren when she dies.
Example two: Inheriting part of a spouse’s estate (below threshold)
Anna’s estate is valued at £320,000 when she dies, with no debts to her name. She opts to leave £200,000 to her husband Matt and the remaining £120,000 is split equally between their three children and five grandchildren. Because Anna’s estate is valued below the basic IHT threshold of £325,000 per person, none of the assets passed onto her children or grandchildren are taxed. Matt receives the full £200k inheritance passed to him tax-free because 1) there were no debts to repay, and 2) he was Anna’s spouse.
Example three: Inheriting part of a spouse’s estate (above threshold)
Jake’s estate is valued at £700,000 when he dies, with debts totalling £25,000, making the true value of his estate £675,000. He decides to leave £300,000 to his civil partner Barry and to split the remaining £375,000 in assets between his friends.
John’s £300,000 is inherited tax-free because of Jake and Barry’s civil partnership status.
Jake’s friends’ £375,000, however, is subject to inheritance tax. The taxable amount is calculated by deducting Jake’s IHT allowance of £325,000 from the total (£375,000), leaving £50,000 to be taxed. The standard inheritance tax rate of 40% applies:
£50,000 x 0.4 = £20,000
The inheritance tax owed on Jake’s estate is £20,000. Jake’s friends, therefore, would split between them £325,000 tax-free and from the taxed portion, the leftover £30,000—or £355,000 in total. There are five friends included in Jake’s will, meaning each receives £71k.
Because Jake has used the entirety of his IHT allowance in bequeathing part of his estate to his friends, Barry receives no increase to his basic inheritance tax threshold. However, Barry and Jake’s house is left to Barry and is his main residence. Jake used none of his ‘residence nil-rate band’ allowance of £175,000, which can now be transferred to Barry.
In this scenario, if Barry and Jake had children, then Barry could have left the kids his home when he died and enjoyed an elevated IHT threshold of £675,000 in total (his £325k basic allowance + his £175k residence nil-rate allowance + Jake’s £175k nil-rate).
However, if Barry and Jake chose not to have children, then Barry’s estate would not be eligible for the main residence band, but would instead be exempt from IHT only up to £325,000 as standard.
When IHT is due and how to pay it
Inheritance tax is charged to a person’s estate, not the people inheriting that estate. Inheritance tax is due at the end of the sixth month after the deceased’s death, and can be paid directly to HMRC via their website, via your bank, over the phone, or by cheque.
Tips for minimising your loved ones’ inheritance tax bill
Having tallied up yours and your spouse’s or civil partner’s estate(s), you may have discovered that your loved ones will be hit with a hefty IHT bill upon your death. Thankfully, there are a few avenues you can explore to minimise the tax your estate will owe.
Gifting assets such as cash or property is one way to minimise inheritance tax, provided that you give away those portions of your estate more than seven years before your death.
Alternatively, relinquishing control of your estate by placing some or all of it in a trust can be a tax-efficient way to ensure your loved ones receive the maximum possible amount of their intended inheritance.
Lastly, it should be noted that the government offers a 4% decrease in the inheritance tax rate for anyone who leaves 10% or more of their estate to charity.
Conclusion
Inheritance tax for married couples carries exemptions and benefits not afforded to single individuals, meaning your nearest and dearest receive more of what you’ve set aside for them when you die.
Unfortunately, however, the rules around inheritance tax in the UK are complex and often change. This makes calculating the inheritance tax you or your loved one may owe quite difficult, not to mention then taking legitimate steps to minimise the future bill.
For sound, reliable advice from UK experts in inheritance tax, get in touch with UWM Accountants today. It’s never too early to get your affairs in order.
