How to make the most of tax-free allowances for married couples?
There are major benefits to being married or in a civil partnership when it comes to inheritance tax.
If you are married or in a civil partnership, then it is possible to reduce Inheritance Tax by utilising spouse exemptions and making the most of any transferable allowances. Unfortunately, the same exemptions and reliefs are not available to unmarried couples, regardless of how long they have been living together and the only way for them to benefit in the same way is to get married or to enter into a civil partnership.
In this blog, we consider how joint planning can benefit you from an Inheritance Tax (IHT) perspective.
Making Use of Both Nil Rate Bands
Every individual is entitled to a tax exempt amount on death. This is referred to as the Standard Nil Rate Band and is effectively the threshold above which Inheritance Tax is payable. The Nil Rate Band has been set at £325,000 since 2009 and this amount has been fixed until April 2026. This is the amount that you can pass on when you die before your estate is subject to Inheritance Tax.
However, any transfers between spouses are exempt. This means that you can pass on the full value of your estate to your spouse without any Inheritance Tax being payable. It's also likely that none of their nil-rate band has been used, and the partner will be able to add the unused balance to their own, effectively doubling the threshold. There are some exceptions to this, for example if your spouse has remarried or reduced the value of the estate by spending or gifting.
Because on first death, the Nil Rate Band was effectively not used due to the spouse exemption then on second death, the surviving spouse effectively has two nil rate bands to set against their estate. This is what is known as the Transferable Nil Rate Band. This means that as a couple (married or in a civil partnership), you can pass on up to £650,000 free of Inheritance Tax. This applies even if your partner has already died, provided they died after 12 November 1974. Of course, Inheritance Tax could still be payable upon second death (i.e. when both you and your spouse die), if the value of the estate exceeded this amount.
Please note that this transferable amount would be reduced if assets passed to anyone else other that your spouse or civil partner (or another exempt beneficiary such as a charity) on first death. Careful planning is required in the case of second marriages, to ensure the available nil rate bands are not lost.
As we have seen, the nil rate band has remained static now for over ten years and has been frozen until April 2026, while asset values and house prices continue to rise. This means that if the surviving spouse dies many years later, the nil rate band might not go as far towards eliminating the estate’s IHT liability.
Married couples and civil partners can make use of each other’s tax-free allowance without special tax planning
Owning Property Jointly
In addition to the Standard Nil Rate Band and the Transferable Nil Rate Band, the Residence Nil Rate Band (RNRB) was introduced to provide additional relief from Inheritance Tax against the value of the family home. This extends the nil rate band by up to £175,000 per individual, however, there are a number of caveats to this, but the main conditions are:
The relief cannot exceed the value of the property.
The property must be passed to what is deemed a lineal descendant, for example a child (including step-children) or grandchild.
The relief is gradually revoked on estates valued at over £2 million.
Passing on a jointly owned property on second death effectively doubles up on the RNRB, as couples can claim relief of up to £350,000 against the value of their home. This in effect means that couples who are married or in a civil partnership can have up to £1 million before Inheritance Tax becomes payable.
Unfortunately, as it stands, this main residence allowance isn't applicable to family members that aren’t direct descendants. This also means that the average childless couple will be £350,000 worse off than couples with just a single child when it comes to Inheritance Tax. As is the case for the Standard Nil Rate Band, any unused main residence allowance can also be passed between spouses, although this will also be redundant for childless couples. And so, for the time being, those who don’t have direct descendants to whom they can leave their main residence will be unable to make use of this allowance. Although the inequity of this suggests that we might see the law amended at some point in the future, for now those unable to make use of the new nil-rate band will find themselves facing larger potential inheritance tax bills than couples with children and will need to act accordingly.