When you die, the assets which pass across to your surviving spouse or civil partner are exempt from inheritance tax. Assets passed to any other beneficiary are exempt up to a limit. Assets passed which exceed this limit are charged to Inheritance Tax (IHT). The IHT allowance for 2014/15 is £325,000 per individual but the percentage of the balance of your individual IHT allowance which has not been used to cover bequests to others is also passed across to the surviving partner, making the maximum a couple can leave IHT free £650,000.
The IHT remaining for use against the surviving partners estate is calculated by reference to the percentage of used allowance at the time of the partners death and then adding this to the surviving partners allowance.
This is best shown by example:
Tommy died in February 2008 when the IHT threshold was £300,000. He made bequests of £120,000 which was 40% of his tax free allowance, leaving 60% which could be passed on to his wife Gina. When Gina dies in 2014 the threshold is £325,000 which means Gina can leave bequests of £325,000 from her own allowance plus 60% of £325,000 as the balance of Tommy’s IHT threshold or a further £195,000, making a total of £520,000 IHT free.
The key to ensuring the correct amount of allowance is passed across is keeping records and taking good advice. There are many gifts which can be made which do not count for IHT purposes and we will be happy to talk to you about all of these.
If you make gifts then keeping good records is essential. It makes it easier for the executors to ensure the correct amount of unused allowance is passed to the surviving partner and that the right amount of IHT is paid. If you are uncertain how much allowance remained at the time of your partner’s death we can obtain details and advise you on this.
Top tip: A great idea would be to have a personal asset healthcheck undertaken on a regular basis. The IHT position is then calculated and any advice relating to minimising the amount of tax legally payable can be given. Just speak to a member of the team.