Inheritance Tax

The 'residence nil-rate band' is an allowance of up to £175,000 – not a flat rate.

So if your home is worth less than this, and it passes to a direct descendant, the main residence allowance would be equivalent to your home's actual value (at the time of your death). For example, if your home's worth £150,000 then your main residence allowance would be £150,000 (you wouldn't have an extra £25,000 of allowance to offset against other taxes).

It's more complicated if, after you die, your home passes to your spouse and then, after their death, your home passes to your direct descendants.

In this situation, your spouse would have their own main residence allowance of up to £175,000, but also inherit your unused main residence allowance – so a combined allowance of up to £350,000. Note that your spouse would inherit the full £175,000 of your unused allowance even if your home was worth less than £175,000 at the time of your death (so, using the example above, the allowance your spouse inherits wouldn't be capped at £150,000).

When your spouse dies, their main residence allowance would be equivalent to the lower of £350,000 (their allowance, plus the £175,000 inherited from you) and the value of your home at the point of their death.

So, if your home is worth £250,000 at the time of your spouse's death, their main residence allowance would be £250,000. But if your home is worth £380,000, for example, their main residence allowance would be capped at £350,000.

Yes, you'll qualify for the £175,000 main residence allowance regardless of whether you're married, civil partnered, co-habiting or single, so long as you leave your home to a direct descendant (and your estate is worth less than £2 million).

However, cohabiting couples can't transfer unused allowances between them, so they can't get a combined main residence allowance of £350,000.

These rules are backdated – so will apply even if your partner died years ago. The key to what extra allowance you get relies on the percentage (not amount) of the allowance your spouse used.

If your spouse died in 2012, for example, and used 50% of their basic Inheritance Tax allowance, you'll get an extra 50% of the current allowance (in other words, 50% of £325,000) added to your own basic Inheritance Tax allowance.

In addition, you'd also get 100% of their main residence allowance (£175,000), which your spouse wouldn't have used because it didn't exist in 2012. The full main residence allowance is available for transfer unless their estate was worth more than £2 million (at which point the main residence allowance starts to reduce). 

As explained, these extra allowances will be on top of your own allowances. 

An example should help...

Mr Youngatheart passes away some years before Mrs Youngatheart, back when the basic Inheritance Tax allowance was £250,000. He gave £50,000 to each of his three children – so used 60% of his allowance. The rest of his estate went to Mrs Y.

When Mrs Y dies, as she planned to pass her home to her children, she has £500,000 free of Inheritance Tax due to her own allowances (£325,000 + £175,000). But she also benefits from the unused percentage of Mr Y's allowances. He didn't use 40% of his basic allowance, so Mrs Y gets another 40% of the current basic allowance (£130,000), plus she gets 100% of Mr Y's main residence allowance (£175,000). This means Mrs Y's total tax-free allowance is £805,000. 

If you and your partner are not married or in a civil partnership, any unused Inheritance Tax allowance or main residence allowance can't be transferred between you. This perk is strictly for married or civil-partnered couples.

This means it can be more complicated for unmarried couples, particularly those with children together, to reduce Inheritance Tax liability. In situations such as these – especially if you've got a large estate – it can be worth seeking financial advice.

Also have a read of Martin Lewis's Is being married financially worth it? blog.

If you've been widowed and inherit your spouse's unused IHT allowance, you won't automatically lose it if you later remarry.

However, unused IHT allowances can only been passed on once. This means if you inherit a spouse's allowance you won't be able to pass it on to another person (like a new spouse – they'd be limited to inheriting your own unused allowance).

Therefore widows/widowers who remarry and who want to take advantage of their first spouse's unused IHT allowance should plan carefully.

Again, this is very complicated, but here's an example...

➡️ John and Diane are married. Diane dies, leaving everything to John, meaning John inherits Diane's basic IHT allowance of £325,000.

➡️ John later remarries, to Karen, and dies before Karen does. John can't pass on the unused allowance he inherited from Diane to Karen, as inherited allowances can only be transferred once.

➡️ So John makes a lifetime gift of £325,000 to his children (alternatively, he leaves them £325,000 on his death) – which is covered by the unused IHT allowance he inherited from Diane. John leaves the rest of his estate to Karen.

➡️ Karen has her own basic IHT allowance of £325,000, plus the £325,000 of unused IHT allowance she inherited from John (so £650,000). But if you factor in the gift of £325,000 that John made to his children – which was covered by the unused IHT allowance he inherited from his first wife Diane – between John and Karen, they effectively have a basic IHT allowance of £975,000.

➡️ John and Karen leave their £500,000 home to John's children. This means John and Karen's effective IHT-free threshold increases to £1.325 million, with the extra allowance made possible by their respective main residence bands (£175,000 x2).

As it's a complex area of Inheritance Tax, seek financial advice if you're impacted.

People in certain professional roles are exempt from Inheritance Tax if they die in active service. This includes armed forces personnel, police, firefighters and paramedics, plus humanitarian aid workers.

The exemption also applies if a person who was injured on active service later dies as a result of the original injury, even if they're no longer on active service.

This is a sensible step for anyone who has detailed questions about Inheritance Tax and what happens to your money once you're gone.

First of all though, try to make sense of the basics yourself, as it's much cheaper. And consider if you're even impacted by Inheritance Tax in the first place. If your total assets are worth less than £325,000 (or £650,000 if you're a married couple) you shouldn't pay the tax anyway, so there's little point.

But if you have a large estate, this is where paying for expert legal or tax advice can be well worth it – spend £100s to potentially save £10,000s (or more).

For those with big estates, an independent financial adviser may – depending on their qualification – be able to help (see our Financial advice guide), but a solicitor or tax accountant is a better bet for more specialised information. Preferably find one who is a member of the Society of Trust and Estate Practitioners (STEP) – take a look on the STEP and Chartered Institute of Taxation websites.

You can get free 30- to 60-minute inheritance-planning advice via both VouchedFor* and Unbiased*, sites that allow you to search for local independent financial advisers. Follow our links, enter your postcode, and contact your chosen adviser by phone or online to arrange your free session, which you can use to ask questions and identify what steps you should take with your inheritance planning.

To make sure you get the most out of the session, it's a good idea to have a summary of your financial situation to hand – any savings, debt, incomings, outgoings – as well as details of existing wills, trusts and future plans.

Setting up a trust is a way of managing your assets (savings, property, investments, etc) on behalf of a beneficiary (like a loved one). You put some of, or all, your assets into a trust and a trustee then manages the trust – according to your instructions – on behalf of the beneficiaries.

Along with allowing you to exercise control over how your assets are used or spent after you die, trusts can also be a way of passing on assets more tax efficiently.

Yet there are different types of trusts and rules can vary, including in relation to Inheritance Tax. With some trusts you pay Inheritance Tax on setting up the trust, others when the trust has been in existence for 10 years, and others if you make transfers into the trust in the seven years before your death.

As the rules around trusts are complex, before opening one it's best to seek financial advice. You can find more information about trusts and Inheritance Tax on Gov.uk.