In the run-up to the 2024 Spring Budget, there was widespread speculation that the chancellor would pull an Inheritance Tax (IHT) rabbit out of the hat.
Many speculated that Jeremy Hunt would cut the IHT rate – or even abolish the tax altogether – as the last roll of the dice before a general election.
As it transpired, the chancellor made no changes to IHT in the Budget. This may have come as a blow if you’re worried about the IHT that may be payable on your estate upon your death.
Recent figures show that, if you’re worried about the prospect of paying IHT, you may be right to be concerned. With the nil-rate bands being frozen until at least 2028, ever more estates are being dragged above the nil-rate bands.
Indeed, FTAdviser calculated that, based on data reported by HMRC in March 2024, IHT receipts are on track to hit £9.7 billion by the 2028/29 tax year.
Read on to learn more about how your IHT liability is affected when your partner dies, how it changes if you remarry, and a few methods you can use to reduce your IHT liability now.
Your partner’s unused nil-rate band is added to yours when they die
Although the Institute for Fiscal Studies reports that only around 5% of all deaths attracted IHT in the 2022/23 tax year, it is often considered to be Britain’s most-hated tax.
IHT is payable at a rate of 40% on all assets worth above the nil-rate band of £325,000 (2024/25). An additional main residence nil-rate band of £175,000 (2024/25) can be claimed if the deceased’s main residence is passed on to direct descendants.
This means that an individual’s nil-rate band can be up to £500,000. So, if your estate is worth less than this, no IHT will usually be due.
The “spouse exemption” allows assets to be left to you IHT-free if your spouse or civil partner dies.
Any portion of your deceased partner’s nil-rate band that remains unused can also be passed on to you. This in principle means that, after your partner dies, you could now have a personal nil-rate band of £1 million.
If you remarry, you can still benefit from this additional tax relief
Depending on when you lost your partner, you may have started a new relationship or even remarried.
Fortunately, remarrying doesn’t stop you from being able to benefit from your ex-partner’s unused nil-rate band. Moreover, if your new partner was also previously married or in a civil partnership, as a couple you can potentially benefit from four nil-rate bands.
Importantly, to benefit from your deceased partner’s nil-rate band after you remarry, you have to leave at least one nil-rate band to someone other than your current spouse.
For example, Julie was married to Paul, and they had a child named Sarah. In 2020, Paul passed away and left everything to Julie. Because they were married, Paul’s estate passed IHT free to Julie. This then meant Julie’s estate benefited from her and Paul’s full nil-rate bands, allowing her to pass on up to £1 million IHT free.
Julie then married Stephen in 2024. As a couple, Julie and Stephen have a combined nil-rate band of £1 million. However, if Julie redrafts her will to leave a legacy equal to Paul’s nil-rate band to her daughter Sarah, Julie and Stephen can benefit from three nil-rate bands, potentially totalling £1.5 million.
Depending on the value of your estate, this rule could allow you to wipe any IHT liability or cut the amount of tax due on your death.
There are ways you can minimise your own Inheritance Tax liability
Even if your partner used up their nil-rate band by passing on inheritance to other family and friends, there are other ways you can reduce the IHT liability of your estate.
Gifts made more than seven years before you die are usually exempt from IHT. If you die within seven years of giving a gift a lower rate of IHT may be due.
“Gifting from income” allows you to give regular gifts to loved ones that immediately fall outside of your estate for IHT purposes. These gifts must be part of your normal expenditure, be from surplus income and giving them cannot affect your quality of life. Examples of gifts you could give include:
- Monthly payments to help your children with living expenses
- An annual gift to help cover a grandchild’s school fees
- A regular contribution to cover the cost of a sibling’s health care.
In addition, you can make as many “small gifts” of £250 or less as you like, and larger gifts of up to £3,000 a year (2024/25) and these will fall outside your estate for IHT purposes. Certain wedding gifts can also instantly fall outside of your estate.
As you can read in this guide on what happens to your partner’s pension when they pass away , pensions also normally fall outside of your estate for IHT purposes. So, you can mitigate your IHT liability by contributing more to your pension.
A financial planner can use their expertise to build a bespoke strategy to minimise the IHT payable on your estate, while also helping you to live the life you want.
Get in touch
As a financial adviser in Essex we’re ideally placed to help you understand your new IHT situation following the loss of your spouse or civil partner.
Please email hello@solusfinancial.co.uk or call us on 01245 984546 to find out how.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning and tax planning.