Can Widowed Couple Combine Spouses' Inheritance Tax Exemptions?
Democratic governments levy inheritance taxes when an individual departs from this life, and the levy can be quite a hefty 40% on anything exceeding a certain limit. But a couple who are still alive when one of them kicks the bucket can potentially pass on up to £1 million tax-free, depending on their circumstances.
To mitigate the effects of inheritance tax, extra residence-based allowances and transferable allowances from spouses can be useful resources. However, a unique set of circumstances makes it more complex for a couple who have been widowed and have children from their late spouses.
Luis Amato, a private client advisor at HFMC Wealth, notes that additional allowances are only available if these allowances were not used when their late spouses passed away. To clarify if this is possible, it's essential to consult an expert and review one's wills to ensure they're structured correctly.
Here's the gist:
- Unused Allowances: You may be able to benefit from unused allowances from your late spouses, but only if they were not utilized at the time they died. Consulting a solicitor or financial planner can help determine this.
- Current Allowances: The current Nil Rate Band (NRB) is £325,000 per person, which can be transferred to your respective estates if your late spouse did not use it completely. The Residence Nil Rate Band (RNRB) gives an additional inheritance tax allowance of currently £175,000 per person, providing that one's main residence is passed to direct descendants (children or grandchildren). Unused RNRB from your late spouses may also be transferred, potentially providing each of you with £350,000 in RNRB. However, RNRB is reduced if an individual's estate exceeds £2 million, tapering at a rate of £1 for every £2 over this threshold.
- Potential Allowances: If neither of your late spouses used their allowances, your potential combined IHT-free threshold could be £1 million per person, totalling £2 million combined. But, these additional allowances are only available if they were not used when your late spouses passed away.
- Review and Update Your Wills: To fully benefit from these allowances, it's essential to ensure that your wills are structured correctly, particularly the RNRB if applicable. Good legal advice is crucial to ensure your wills are tax efficient and align with your estate planning goals.
- Monitor Your Estate Value: If your estate is likely to exceed £2 million, consider ways to reduce the taxable estate to avoid losing the RNRB through tapering. This might include lifetime gifting strategies or setting up trusts.
- Ensure the Allowances are Claimed on Second Death: When the surviving spouse passes away, their executors must formally apply to HMRC to transfer any unused NRB and RNRB. Proper record-keeping and legal guidance will help ensure this process runs smoothly.
While it's an opportunity to make use of additional allowances, it's important to consider your lifetime requirements and how this impacts you if one of you pre-deceases the other. Consulting a financial planner alongside a quality solicitor ensures that your wishes are set up correctly and tax efficiently.
- To potentially access unused inheritance tax allowances from your late spouses, it's important to consult a solicitor or financial planner and review your wills to determine if the allowances were not utilized at the time they died.
- The current Nil Rate Band (NRB) is £325,000 per person, with the Residence Nil Rate Band (RNRB) providing an additional £175,000 per person, if your main residence is passed to direct descendants. Potentially, the RNRB can be transferred from your late spouses, giving each of you a total of £350,000 in RNRB.
- With suitable circumstances, a couple who have been widowed and have children from their late spouses could have a potential combined IHT-free threshold of up to £1 million per person, totaling £2 million combined.
- To benefit fully from these allowances, it's important to ensure that your wills are structured correctly, particularly with regards to the RNRB, as proper legal advice can make your wills more tax-efficient and aligned with your estate planning goals.
- Consider methods such as lifetime gifting strategies or setting up trusts to minimize the taxable estate if your estate is likely to exceed £2 million to avoid losing RNRB due to tapering.
- When the surviving spouse passes away, the executors must apply formally to HMRC to transfer any unused NRB and RNRB. Keeping good records and seeking legal guidance will help make this process smoother.
