Inheritance Tax - Is my understanding correct?

Rumblejumble1

Evening everyone

I have just read the following section of an article on this website about inheritance tax......

4. Any unused inheritance tax allowance passes to your spouse

As explained, any assets left to your spouse or civil partner will be exempt from inheritance tax. Yet the inheritance-tax related perks for married couples don't end there...

On top of this, your spouse's inheritance tax allowance rises by the percentage of your allowance that you didn't use, meaning together a couple can currently leave £1 million tax-free (2 x £325,000 tax-free allowances + 2 x £175,000 main residence allowances).

This can sound complicated, so here's an example...

Mr and Mrs Youngatheart have assets worth £1 million between them. Mr Y dies first in January 2025 – leaving everything to Mrs Y – so his £325,000 tax-free allowance is passed on, as well as his £175,000 main residence allowance. In total, this means Mrs Y may have an up-to £1 million tax-free allowance: her allowance, plus her inherited allowance from her deceased husband.

What I am struggling to understand is, could Mrs Y then pass on this £1 million tax-free allowance to her children? So if she left her children an estate worth just under £1 million, would they have to pay inheritance tax?

I would be really grateful if someone could clarify for me

Thank you!

HappyHarry

Yes, Mrs Y’s estate could have up to £1m available in nil rate bands.

An estate under £1m may avoid inheritance tax altogether.

There are, however, many ways in which this £1m might be reduced or not apply.

Exodi

Rumblejumble1 said:

What I am struggling to understand is, could Mrs Y then pass on this £1 million tax-free allowance to her children? So if she left her children an estate worth just under £1 million, would they have to pay inheritance tax?

Her children wouldn't have to pay IHT on her hypothetical estate as she has a tax-free allowance that covers it.

She's not passing the allowance on to her children, her allowance is being applied against her estate.

A question for others since as it just popped into my head - if Mrs Y in this example met a new toy boy after her husbands passing and married him, let's call him Mr Z, could she pass on her inherited allowance of £1M to him, meaning he has potential allowance of £1.5M? Let's say he re-marries Mrs A after she dies, etc, etc

km1500

no because although she can pass her 500k allowance onto Mr Z she cannot pass her deceased husband's 500k to him.

Rumblejumble1

HappyHarry said:

Yes, Mrs Y’s estate could have up to £1m available in nil rate bands.

An estate under £1m may avoid inheritance tax altogether.

There are, however, many ways in which this £1m might be reduced or not apply.

Thank you so much for this HappyHarry. Do you know where I can find further information on the ways in which the £1m nil rate band could be reduced or not apply? Thanks again.

HappyHarry

There are two parts: The Nil Rate Band and the Residence Nil Rate Band.

I would suggest google searched on both these.

Or post the circumstances of the estate you are thinking about and let people here comment.

Rumblejumble1

HappyHarry said:

There are two parts: The Nil Rate Band and the Residence Nil Rate Band.

I would suggest google searched on both these.

Or post the circumstances of the estate you are thinking about and let people here comment.

Thanks HappyHarry. My living married parents are leaving their property to my sibling and I. We are trying to establish if we will have to pay inheritance tax. We believe the property to be currently worth around £800,000. They do not have any other assets but my father does have a private pension. Any advice would be gratefully appreciated.

HappyHarry

With an estate of £800,000 if they jointly own the property and have not made any non-exempt gifts over the past seven years, and the property (or proceeds of sale from such) are being left to their children then their estates should not need to pay any inheritance tax.

If the entire estate was in excess of £2m, then the Residence Nil Rate Band would be reduced. This does not appear to affect you at present, but the government are planning on bring unspent pension pots into inheritance tax from April 2027 which could affect your circumstances, if your father's unspent pension plus the estate exceeded £2m.

Rumblejumble1

HappyHarry thank you so much! I personally find the information on the Government website very confusing, so I am incredibly grateful for this clarification.

Tixallman

Hello I am going through this and find it very complex. rumble Jumble above said that the PROPERTY was worth £800,000, not the estate, and that is well above the RNRB for a married couple of £350,000 so wouldn't that attract IHT of somewhere in the area of £180,000? I hope I am wrong......

HappyHarry

Tixallman said:

Hello I am going through this and find it very complex. rumble Jumble above said that the PROPERTY was worth £800,000, not the estate, and that is well above the RNRB for a married couple of £350,000 so wouldn't that attract IHT of somewhere in the area of £180,000? I hope I am wrong......

The OP suggested that due to the value of the property, the total value of the estate was circa £800,000. With the RNRB and Nil Rate Bands available, it would be possible for the entire estate to have up to £1m charged at 0%.

In this case, the £650,000 Nil Rate Bands would cover most of the £800,000 estate, and the RNRB available would cover the remaining £150,000.