Inheritance Tax for married couples – How can married couples reduce the Inheritance Tax payable on death?
Inheritance Tax (IHT) will only apply to the decease’s estate where there is a chargeable transfer (ie value transferred which is potentially subject to IHT) either during lifetime or on death.
Applying the Nil Rate Band (NRB)
When calculating an IHT liability the nil rate band (NRB) will be taken into account to reduce the amount exposed to tax liability. The NRB is currently £325,000, unchanged since 6 April 2009, and is available to both UK domiciled and non-UK domiciled individuals.
The NRB could be less than £325,000 when there is a chargeable lifetime transfer.
Lifetime IHT is based on a cumulative total of transfers, which means that it is necessary to take account of any other chargeable lifetime transfers made by a donor in the previous seven years.
It is necessary to also factor in an individual’s entitlement to yearly lifetime exemptions; annual exemptions (£3,000), small gifts (£250) and wedding gifts (varies depending on the relationship).
The availability to transfer the unused NRB only applies to death and if there is a widow or widower. The transfer to the surviving spouse or civil partner will not be the amount of unused NRB, instead, it is the percentage of the unused NRB.
This results in the surviving spouse being entitled to death to 100% of their own NRB plus any percentage of the unused NRB from the death of their spouse or civil partner.
Example of Inheritance Tax for Married Couples
Marjory died in 2002 and used half of her NRB (then £250,000). On the death of her widower, Fred in 2020, he is entitled to 100% of his NRB (£325,000) plus 50% of Marjory’s transferred NRB: £162,500 (½ x £325,000).
Inheritance Tax for Non-domiciled Individuals
A person who is not domiciled or not deemed domiciled in the UK will only be liable to IHT on assets situated in the UK. Assets situated outside of the UK, otherwise known as ‘excluded property’, are outside the scope of IHT.
The NRB will be offset only against the UK assets, and the balance of the NRB can be transferred if there is a surviving spouse.
Gifts between UK domiciled spouses and civil partners (during lifetime or death) are exempt from IHT. If one is UK domiciled and the other spouse or civil partner was not domiciled or not deemed domiciled in the UK, then only the first £325,000 of the transfer will be exempt from IHT.
It is possible for a surviving non-domiciled spouse or civil partner to make an irrevocable election to be treated as UK domiciled and therefore not have any restriction if they choose.
If both spouses or civil partners are not UK domiciled or not deemed domicile, there is no restriction on transfers between spouses or civil partners.
Inheritance Tax for Married Couples Dying at the Same Time
If it is unclear which of the married couple or civil partners died first, then HMRC inheritance tax manual para 43040 states the elder person is treated as dying first. Therefore, any unused NRB would be transferred to the younger person’s estate.
The rules are different in Scotland and Northern Ireland.
Pitfalls to Watch Out For
- – A claim to transfer the NRB must be made on second death by submitting an IHT402 form or if a grant is not required an IHT216 form with the required supporting documents within two years from the end of the month of the second death.
- – The transferrable NRB can only be used on death, not against chargeable lifetime transfers.
- – If a person dies within seven years of making a lifetime gift that is potentially subject to IHT, then the NRB of the deceased will first be offset against these lifetime gifts before the balance is set against the estate on death. This can therefore reduce the amount available for transfer to a surviving spouse.
- – A couple who entered into a civil partnership before 5 December 2005 outside of the UK, will be treated as forming a civil partnership in the UK on 5 December 2005 (when it became law in the UK). In such circumstances, the first death of a civil partner must have occurred on or after 5 December 2005 to benefit from the transferable NRB.
Inheritance Tax for Married Couples – Not So Simple
A first glance the transferable NRB looks simple enough, it’s based on the percentage of the unused NRB and will be limited to 100%.
A person could accumulate more than one transferrable NRB from several marriages or civil partnerships. But no individual is entitled to more than a maximum of two full NRBs.
Complications will arise when the widow (er) was married or in a civil partnership with someone who had also been entitled to a transferrable NRB.
If you are getting close to the two-year claim period after the second death, contact HMRC to explain the dilemma you may be facing in terms of who married who. HMRC can extend the claim period for transferring the NRB (see IHT manual para 43009).Inheritance Tax (IHT)