How to get £2million inheritance tax (IHT) allowances

Monday 26th October 2020

Diana is a partner in our personal law team and specialises in advising clients on tax and estate planning.  In addition to being a solicitor for over 25 years, Diana is also a chartered tax adviser.  Here she looks at inheritance tax.

It is fair to say that inheritance tax is pretty unpopular. It is also very complex and in no way based on the real world or logic, which makes it even more unpopular, with all but the hardened tax advisor.

One of the most complex and yet widely applicable sets of rules introduced in the last few years relates to the “residence nil rate band”; an additional allowance available on death to reduce the amount of IHT payable. This allowance was brought in in 2015, with a headline figure of £1million allowances for a couple and taking the family home out of tax.

That headline was as accurate for many people as is the headline to this article, but I will plough on regardless.

It is true that, with a fair wind, and in all the right circumstances, a couple with children can now benefit from a £1million IHT threshold, which means they can pass up to £1million to their children without paying any IHT.

The “right circumstances” include the following:

  • There must be a couple, i.e. two people. The threshold for one person is up to £500,000.
  • They must be married or in a civil partnership at the time of the first death. A divorced couple doesn’t count, and neither does a couple who have not formally tied the knot, even if they have been together for 20 years and have children together.
  • They must have children. Adopted and step-children do count, but not the child of an unmarried partner.
  • They must own their own home, and it must be worth at least £350,000 to get the full allowance, although there are further complex rules to allow for downsizing to a smaller home, or moving into residential care.
  • They must leave their home to their descendants, either on the first death or the second.

So, not everyone benefits from a £1million IHT threshold, and not all family homes will escape tax. This is true, but it is also true that many people could benefit in this way, but lose out by not making a Will, or not getting the right advice when making a Will or when administering the estate.

This is particularly so for people in the increasingly common situation of a second marriage or partnership, and that is where I come back to my headline. How to get £2million IHT allowances.

Well, you need to do all the above, plus the following:

  • Each member of the present couple must have been married or in a civil partnership, and widowed (not divorced) before.
  • The first spouse or partner to die in each of the original couples must have left everything to the survivor.
  • The total combined estate must not be more than £2million, as that results in a tapering of the residence nil rate band.

Simple! Well not that simple, but it is possible, and the point of this article is not to recommend that you kill your spouse and remarry, but to show that the complexity of these rules makes it virtually impossible for an individual to make the most of the allowances they are entitled to without specialist advice, which we are happy to provide.

If you would like further information or to discuss your estate planning, then please contact myself or a member of our team below.