Inheritance Tax planning for married and civil-partnership couples

Inheritance Tax planning tips for married and civil partnership couples

Inheriting property

No Inheritance Tax will be owed on assets transferred to a surviving spouse on death. Additionally, assets may be subject to a valuation adjustment for Capital Gains Tax (CGT) purposes, meaning that Capital Gains Tax will only apply if the assets have appreciated in value since the date of death.

Inheriting an ISA

 The Inheritance Tax Spousal Exemption will apply to a spouse's ISA, meaning the value of the ISA would pass free of Inheritance Tax. The surviving spouse can then add the inherited ISA assets to their existing ISAs, even if this would exceed the normal ISA allowance.

 Inheriting a pension

 Pensions are generally exempt from Inheritance Tax.  Until April 2027, the tax consequences of inheriting a pension will depend on how a pension is structured and the deceased’s age when they died.  If they were to pass away before 75, it is generally possible to withdraw the funds tax-free. Otherwise, any withdrawals will be taxable at your marginal rate of income tax.

 From April 2027, pensions will be considered part of an estate for Inheritance Tax purposes. These changes should not impact pensions that are transferred to a spouse.

 Read more on Inheritance Tax pension changes here.

Spousal Exemption

 The Spousal Exemption only delays the point at which Inheritance Tax applies; therefore, it’s important to have a plan in place to deal with the second death.

 Couples with even moderate amounts of wealth should seek joined-up tax and financial planning advice to ensure they are benefiting from legitimate ways of reducing their Inheritance Tax liability, ensuring they can pass as much as possible to their families.

 If arranged properly, a married couple can transfer up to £1 million to their family without suffering Inheritance Tax.

 Lifetime gifting

 For those with assets in excess of £1million, making lifetime gifts can be a tax-efficient way of passing wealth to the next generation.

 Lifetime gifts become exempt if the donor survives for seven years from the date of the gift, and there are various exemptions that may apply. However, it is important to ensure that sufficient assets are retained for a comfortable retirement, and the tax consequences of making any gifts, for example, crystallising a Capital Gains Tax liability, are taken into account before making a gift.

 Have an up-to-date Will

 A Will allows you to distribute your estate according to your wishes, regardless of the beneficiaries' legal relationships, though forced heirship applies in Scotland.

 If an individual dies without a valid Will, their estate will be distributed according to intestacy rules. Typically, if married or in a civil partnership with children, the surviving spouse inherits a portion of the estate, and the remainder goes to the children. This distribution varies by location within the UK. If there are no children, the spouse receives the entire estate.

 While this approach works for some, it may not suit everyone, especially in blended families, as stepchildren are not included unless adopted.