One Way to Maximise Your Tax Free Estate
Updated: Mar 10, 2021
Everyone is entitled to leave £325,000 to whoever they wish without having to pay Inheritance Tax. The Government has announced, in order to fund its proposals for the capping of Care Costs, that it intends that this amount should be frozen until at least 2018. Inheritance Tax is charged on any estate that exceeds £325,000 at the rate of 40%. The Tax is payable only on the excess above £325,000. For example, if an estate is valued at £500,000 the first £325,000 will not suffer any tax charge (technically it is charged tax, but at 0% and there is therefore no tax payable), but the excess of £175,000 will result in Inheritance Tax being payable, amounting to £70,000!
There is no Inheritance Tax payable where the estate is inherited by a surviving spouse, or civil partner. Until 2007, where the joint estate of a married couple was likely to exceed the £325,000 threshold spouses were often advised to use Discretionary Trusts in their Wills to minimise the amount of tax payable on the death of the survivor of the couple. Following changes to the Inheritance Tax laws this became no longer necessary (at least for Inheritance Tax purposes). The changes meant that if the first spouse to die left all of his, or her estate to their spouse, then when the survivor passed away they would be able to leave £650,000 (2 times £325,000) without paying any Inheritance Tax.
The changes in the Law apply regardless of when the first spouse died and will still be effective even if the survivor remarries. If someone is unfortunate enough to be widowed then, provided that they inherited all of their late spouses estate, they will be able to leave £650,000 without paying Inheritance Tax (2 times £325,000 – one for themselves and one for their deceased spouse.
In order to Claim these additional allowances HM Revenue and Customs do need to be supplied with some information when the surviving spouse passes away. Of course, this can often be many years after the first death and sometimes the necessary details and documentation can be hard to locate. Nowadays, when it is increasingly common for married couples to hold their property and assets in joint names, it is often not necessary to obtain a Grant of Probate of the Will of the first to die, the survivor simply inherits all of the assets under the rules of survivorship. However, even in these cases, information and documentation will be required if there is to be a Claim for an additional allowance (technically called a transfer of a nil rate band). It is therefore very sensible to make sure that the necessary information and documentation is stored at the time of the first death, ideally with the Will of the survivor, so that it is easily to hand when it is required.
Unfortunately these rules do not apply to couples who are not married or in a civil partnership, no matter how long they have been living together. Indeed Actress Helena Bonham Carter recently revealed that she and her Film Director Partner, Tim Burton have been advised to marry for “Inheritance Tax reasons”.
For further information regarding the information and documentation that may be required, or to review your Wills to make sure that they are up to date please contact us.