Guide to inheritance tax for married couples

Inheritance tax – the tax on the estate of someone who’s died – is undoubtedly a complex area of taxation. Even the basics can seem confusing. 

We are sometimes asked exactly what constitutes an ‘estate’: essentially, it is the combined value of the property, money and possessions of the person who has died. Typically, that would include the value of their home (less any outstanding mortgage) and its contents, any cars, jewellery, money in bank accounts and investments etc. 

In this guide, we will discuss inheritance tax and how it affects married couples, exploring standard rates, the nil rate band, and what this means for couples with shared estates.

What is the rate of inheritance tax?

Inheritance tax (IHT) is normally paid at a rate of 40%, but only on the value of your estate above the ‘nil rate band’ of £325,000. However, there are special rules for married couples.

Do spouses pay inheritance tax?

In most cases, there is no inheritance tax to pay if you leave everything to your spouse or civil partner. However, if you do make some bequests (or gifts) to other people, this will start to use your nil rate band. If the value of those gifts exceeds the nil rate band, the excess amount is subject to inheritance tax. The unused portion of your nil rate band can be claimed by the executors of the surviving spouse following their death.

Marriage and inheritance tax example

Imagine a married couple called Bernard and Jane. If Bernard were to die leaving bequests to individuals other than Jane of £100,000 and the tax free allowance is £325,000, that leaves £225,000 unused threshold that can be added to Jane’s tax-free allowance, bringing the total IHT-exempt figure on Jane’s death to £550,000.

Main residence nil rate band allowance

Under new rules which came into effect in the 2017/18 tax year, the nil rate band has been enhanced to make it easier to pass on a main home to direct family without incurring IHT.

Each spouse qualifies for the existing £325,000 nil rate band, but in addition there is currently a £175,000 allowance per person on the main residence when it’s passed to a direct descendent, therefore a couple will jointly be able to pass on £1m tax-free, so long as the conditions are met, one of which is that their main residence is left to a direct descendent. A word of warning – this allowance is not given automatically, so families that decide to take on probate themselves must bear in mind that they will need to claim the extra allowance.

Do married couples pay inheritance tax on property?

Married couples do not typically have to pay IHT on the transfer of property. This key relief is known as spouse or civil partner exemption, which means that transfers of assets between spouses or civil partners are generally exempt from inheritance tax, regardless of the value of the assets.

However, it’s important to note that inheritance tax rules can be complex, and there may be certain circumstances where inheritance tax could still apply, especially if the estate exceeds certain thresholds or if assets are being passed to individuals who are not direct descendants.

Inheritance tax facts and figures

In the public mind, IHT is seen as a particularly unpopular tax, no doubt because it becomes payable at a difficult time when families are grieving. However, the vast majority of the population does not pay inheritance tax. 

According to the HM Revenue & Customs, in the tax year 2021/22, around 5.39% (approx. 27,800 estates) of UK deaths resulted in an Inheritance Tax charge. Although, if you think that your estate will be subject to IHT, or might become liable in the future, it’s a good idea to talk to a Chartered Accountant to explore various ways of keeping the bill to a minimum.

Accountant to explore various ways of keeping the bill to a minimum.

Need help with inheritance tax planning for you and your partner?

Perrys has a dedicated team of inheritance tax specialists ready to advise you on all aspects of inheritance tax. We keep abreast of ever-changing legislation to ensure that you are able to provide for your family and other beneficiaries into the future.

If you’d like further information, please don’t hesitate to get in touch on 01892 543900 or drop us an email via our contact page.