What Are the Rules on IHT if You Are Married?

If you are dealing with an estate of one parent when the other has passed away some time ago, you may have lots of questions about how much inheritance tax your parent’s estate will incur. A common query is that whether, when the first parent passed away, their inheritance tax allowance is applicable to the overall amount that is passed over from IHT in the present.

Let’s start with the basics – the amount that a person is able to pass over to relatives free of inheritance tax, or the “nil-rate band”, is £325,000 as of 2017. Anything that falls over this threshold is then taxed at 40%. If a parent passed away some time ago, the nil-rate band would have been different – much lower than the present day.

Anything left over from the first parent’s allowance is then transferred to a spouse, or a civil partner. When working out how much IHT your parent’s estate will incur, the main factor to take into account is the proportion of the IHT allowance up to the nil-rate band that the first parent had used when they passed away, as the actual figure of the nil-rate band at the time doesn’t matter in this instance.

However, this remaining unused allowance would then be applied to the present-day’s nil-rate band, meaning that the percentage is calculated from that unused figure and added onto the remaining spouse’s inheritance tax-free allowance. If the first parent didn’t use up any of their allowance, this would mean that 100% would be applied to the second parent’s nil-rate band in 2017, leaving an IHT-free allowance of £650,000.

If a property is included in the estate of your parent, the “residence nil-rate band” then applies. This nil-rate band is, as of 2017, £100,000. This is due to rise every year until it reaches £175,000 in 2020, and means that an additional allowance will be added on top of the normal nil-rate band.

If the first parent had passed away earlier, their residence nil-rate band can then, again also be applied to the second parent’s nil-rate band, increasing it by a further £100,000 if the second parent was to pass away in 2017.

What do I do next?

If you’re looking for financial advice regarding reducing inheritance tax, inheritance tax rules and how they will affect you and your family, talk to our financial advice team. Please call on 01926 492406 or email us at enquiries@klofinancialservices.com to make an appointment.