In England and Wales, when one spouse dies, there are significant opportunities to optimise tax efficiency by maximising the use of spousal tax bands. This primarily involves the strategic use of exemptions, allowances, and the inheritance tax (IHT) marital transfer.
Under inheritance tax rules in England and Wales, when a spouse passes away, assets transferred to the surviving spouse are generally exempt from IHT, irrespective of the value. This exemption means that the surviving spouse can inherit the estate without paying tax at the time of death. However, to maximise the tax bands effectively, it is essential to plan ahead.
The standard IHT threshold is £325,000 for each individual, with any value above this being subject to a 40% tax rate. However, a deceased spouse’s unused IHT allowance (the nil-rate band) can be transferred to the surviving spouse, effectively doubling the threshold to £650,000 on the second spouses death, if it was not fully used during the first spouse’s lifetime. Furthermore, the residence nil-rate band (RNRB), introduced in 2017, allows an additional allowance of up to £175,000 per individual, subject to certain conditions, such as passing on the family home to direct descendants.
To maximise these allowances, it’s crucial to plan the estate and ensure that all exemptions are utilised. This might include structuring the estate to ensure the full transfer of unused allowances or considering trusts to preserve the tax-free thresholds.
In conclusion, proactive estate planning can significantly reduce IHT liabilities upon the death of a spouse, allowing the surviving partner to retain more of the inheritance, thus securing a more efficient transfer of wealth. For this reason, it can often be useful to consult with a solicitor with experience in this area when you are estate planning.
Here at Farleys, we have a team of private client specialists with experience in estate planning, trusts, wills and probate. To speak to a member of the team about your requirements, please call 0845 287 0939, contact us by email, or use the online chat below.
