What happens to the inheritance tax allowance of couples when one spouse dies? Is it cut in half?

3 January 2020

Q

I read in Moneywise that the amount that couples can pass on tax free is double that of individuals. But what if one spouse has died? Would their children still be able to claim this when the second parent dies?

From
CJ/Orpington

A

Inheritance tax can be payable if the value of somebody’s estate, on their death, is more than £325,000. This is because individuals will typically benefit from a nil-rate band amount of £325,000, which means that the value of their estate up to this amount is exempt from tax.

UK-domiciled married couples and registered civil partners are allowed to pass assets to each other during their lifetime or when they die without having to pay inheritance tax, no matter how much they pass on. This is known as spouse or civil partner exemption.

In addition, the survivor of a marriage or civil partnership can claim the proportion of their partner’s nil-rate band which wasn’t used on their death in addition to their own entitlement. This means that if the deceased partner did not use any of their nil-rate band, perhaps because they left everything to the surviving partner, then the surviving spouse can benefit from a nil-rate band allowance of up to £650,000. So the answer to your question is yes.

The transferable allowance benefit also applies to the residence nil-rate band, which was introduced in phases from April 2017. This allowance is available for individuals who pass on a residence to direct descendants such as children or grandchildren, but also stepchildren, adopted and foster children. The residence nil-rate ban allowance is currently £150,000 a person, although it will rise to £175,000 per person from April 2020. These amounts are capped subject to the value of the property.

If unused by the first partner, the allowance can be transferred to their spouse or civil partner on death, meaning a couple could have a combined nil-rate band allowance of £1 million from April 2020. 

Patrick Connolly, certified financial planner at Chase de Vere

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