When someone dies, their spouse or civil partner is generally exempt from paying inheritance tax on what they inherit. This exemption applies regardless of the size of the estate being passed on. However, it does not apply to long-term partners without the legal status of a marriage or civil partnership, so cohabiting couples could end up paying more.
Many people don’t think ahead when it comes to inheritance tax, so if you are in a position to talk to your partner or family about the future, it can potentially save everyone a lot of money.
Here we explain the benefits for married couples and civil partners, including how you can pass on your inheritance tax threshold.
What is the spousal exemption on inheritance tax?
This spousal exemption is based on the principle that couples should be able to pass on their assets to each other without incurring a tax liability. It recognises the emotional and financial support that spouses provide to each other during their lifetimes and ensures that this support can continue even after death, as well as minimising disruption to the surviving partner’s life.
This applies to property too, so you can leave your home to a husband, wife, or civil partner when you die and they won’t have to worry about paying tax on it.
The exemption only applies only to spouses and civil partners. Unmarried partners, regardless of how long they have been together, are not eligible.
Spouses and civil partners are also not subject to tax on gifts exchanged between them, regardless of the amount. As long as they permanently reside in the UK and are legally married or in a civil partnership, they can give each other unlimited gifts during their lifetimes. This is important because, in other circumstances, gifts can end up being subject to inheritance tax.
What is the inheritance tax threshold, and can I pass it on?
The current inheritance tax threshold, also known as the nil-rate band, is £325,000. Any estate valued below this threshold will not incur inheritance tax. The nil-rate band is set to stay at this level until at least 2028 after the Chancellor Jeremy Hunt extended the current freeze on the threshold.
But for married couples and civil partners, any unused portion of the nil-rate band can be transferred to the surviving spouse or civil partner, effectively doubling their inheritance tax threshold to £650,000.
If the partner who has died leaves any of their estate to someone else, then the entitlement they pass onto their spouse is reduced in line with that.
Another benefit for families, regardless of marital status, is the increased threshold for those leaving their home to their direct descendants. When you do this, the tax-free threshold can increase to £500,000, provided the home is going to your children or grandchildren.
