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Spouses' Inheritance Tax Allowance: Doubling Up After Loss – A Question Regarding Shared Allowance for Widowed Couples

Upon our spouses' demise, neither of us seized their remaining tax allowances. Could we seize and subsequently utilize them upon our own passing, aiming to transfer an inheritance to our respective offspring?

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Spouses' Inheritance Tax Allowance: Doubling Up After Loss – A Question Regarding Shared Allowance for Widowed Couples

Hey there! Let's talk about inheritance tax and how it affects people who have remarried after being widowed. The question at hand is, if both you and your spouse have previously been widowed, can you make use of the unused allowances from your former spouses for inheritance tax?

Inheritance tax can be a real pain – particularly when it's levied at 40% on anything above the relevant tax-free allowance. However, if you and your partner are still together at the time when one of you passes away, you might be able to pass on up to £1 million tax-free, depending on your circumstances.

So, let's say you and your spouse are in this situation, and you both have kids with your former partners but not with each other. The question then becomes, can you utilize the unused allowances from your earlier marriages?

To clarify, we spoke with two financial advisers to get a better understanding of your specific circumstances.

Firstly, Luis Amato, a private client advisor at HFMC Wealth, pointed out that additional allowances are only available if the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) were not used when your former spouses passed away. To benefit from these unused allowances, it's essential that your wills are structured appropriately.

NRB is the basic amount of wealth and assets that a person can pass on without paying inheritance tax. It's currently £325,000 per person. If your late spouse did not fully use their NRB, the unused portion can be passed on to your respective estates. With this you could potentially have up to £650,000 – your own allowance, plus your late spouse's.

RNRB provides an additional inheritance tax allowance for those who pass their main residence to direct descendants, currently £175,000 per person. Combined with the standard £325,000 allowance, this means they can pass on £500,000 tax-free. Unused RNRB from your late spouses may also be transferred, and if neither of your late spouses used their allowances, your potential combined IHT-free threshold could be £2 million.

Important to note, these additional allowances are only available if the NRB and RNRB were not used when your late spouses passed away. If their estates were fully used up by gifts to beneficiaries or other arrangements, there may be limited or no transferable allowances.

So, to make use of the unused allowances from your earlier marriages, you should:

  1. Confirm unused allowances – Have the estates of your late spouses reviewed to determine if any of their NRB or RNRB was used at the time. Consult a solicitor or financial planner.
  2. Review and update your wills – Ensure your wills are structured correctly to make full use of the available allowances, particularly the RNRB if applicable. It's important to seek good legal advice to ensure your wills are tax-efficient and align with your estate planning goals.
  3. Monitor your estate value – If your estate is likely to exceed £2 million, consider strategies like lifetime gifting or setting up trusts to reduce the taxable estate and avoid losing the RNRB through tapering.
  4. Ensure the allowances are claimed on second death – When the surviving spouse passes away, their executors need to apply to HMRC to transfer any unused NRB and RNRB. Proper record-keeping and legal guidance will help ensure this process runs smoothly.

A second financial adviser, Natalie Donnell, emphasized the importance of making your wishes explicit in your wills to eliminate any room for misinterpretation. She recommended using the first marriage to pass both NRB and RNRB to children, as this would provide each of you with a combined tax-free threshold of £1 million. This approach would be practical by owning your main property as "tenants in common," which ensures that half of the property goes to the deceased's children and the other half stays with the surviving spouse.

  1. If the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) were not used when your former spouses passed away, you may be able to utilize the unused allowances in your own estate.
  2. To benefit from these unused allowances, it's crucial that your wills are structured appropriately, taking into account the transfer of NRB and RNRB.
  3. If you're unsure whether any of your late spouses' NRB or RNRB was used, consult a solicitor or financial planner to review the estates of your late spouses.
  4. To fully use the available allowances, particularly the RNRB if applicable, ensure your wills are reviewed and updated to reflect tax-efficient estate planning goals.
  5. If your estate is likely to exceed £2 million, consider strategies like lifetime gifting or setting up trusts to reduce the taxable estate and avoid losing the RNRB through tapering.
  6. When the surviving spouse passes away, their executors must apply to HMRC to transfer any unused NRB and RNRB. Proper record-keeping and legal guidance will help ensure this process runs smoothly to maximize your personal-finance savings.
Can the remaining spouse utilize the deceased spouse's tax allowances upon their demise for inheritance purposes towards their own children?
Inheritance Question: Can tax allowances from deceased spouses be utilized upon our own demise to distribute assets to our individual children?
Can the remaining spouses utilize the tax exemptions normally granted upon a spouse's demise to transfer an inheritance to their individual children after their own passing?

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