The UK tax office has recently updated its rules for transferring any unused portion of basic and additional IHT thresholds when the first person in a marriage or civil partnership dies.
Find out more about the basic and additional IHT thresholds and see examples of how unused portions can be transferred to a surviving spouse or partner.
The Basic Tax-Free Threshold
The basic tax-free threshold available when a spouse or civil partner dies can be increased to as much as £650,000 ($843,933, €715,226) if none of the £325,000 threshold was used when the first of the couple died.
The basic threshold that is available to their estate is increased by the percentage of the threshold that was not used when the first partner died.
Paul dies leaving legacies totaling £600,000. He leaves £130,000 to his children and the rest to his wife.
The available threshold at the time was £325,000.
The legacies to the children would use up 40% (£130,000 ÷ £325,000 x 100) of the threshold, leaving 60% unused.
When his wife dies, the threshold is still £325,000, so their available threshold would be increased by the unused percentage (60%) to £520,000.
If his wife’s estate isn’t worth more than £520,000 there’ll be no IHT to pay when she dies. If it’s worth more, IHT should be paid on anything above £520,000.
Transferring any unused basic threshold
The estate’s executors must claim to transfer the unused basic threshold when the husband, wife or civil partner dies.
Unused additional threshold
If someone owned their own home or a share of one, their estate may be entitled to an additional threshold.
The extra amount for 2017/18 is up to £100,000. The maximum available amount will go up yearly.
Any additional threshold that is not used when someone dies can be transferred to their husband, wife or civil partner’s estate when they die.
This can also be done if the first of the couple died before 6 April 2017, even though the additional threshold was not available at that time.
The additional threshold and any transferred additional threshold is available if the surviving husband, wife or civil partner:
Leaves a home to their direct descendants; or,
Includes the home in their estate.
The home that the surviving husband, wife or civil partner leaves to their direct descendants does not have to be the same home that they lived in with their partner to either qualify for the additional threshold or to transfer it.
The surviving husband, wife or civil partner does not have to have previously owned the home with their late partner, or inherited it from them.
It can be any home as long as the surviving spouse or civil partner lived in it at some stage before they died and the home is included in their estate.
If the surviving husband, wife or civil partner sold or gave away their home on or after 8 July 2015 and they leave other assets to their direct descendants when they die, the additional threshold may still be available under the downsizing rules.
Couples who are not married or in a civil partnership, or who have divorced, will still be able to benefit from the additional threshold individually if they leave a home to their direct descendants. But they won’t be able to transfer any unused additional threshold to each other.
Where the first of the couple died before 6 April 2017 their estate wouldn’t have used any of the additional threshold as it wasn’t available.
So, 100% of the additional threshold will be available for transfer unless their estate was worth more than £2m and the additional threshold is tapered away.
It’s the unused percentage of the additional threshold that’s transferred, not the unused amount.
This makes sure that if the maximum amount of additional threshold increases over time, the survivor’s estate will benefit from the increase.
Calculating additional threshold
You calculate the actual amount that is transferred to the surviving spouse or civil partner’s estate in two steps:
Step 1. Work out the percentage of additional threshold that wasn’t used when the first of the couple died.
You do this by dividing the unused amount of additional threshold by the total additional threshold that was available when the first of the couple died and multiplying the result by 100.
If the person died before 6 April 2017 the unused additional threshold and total available additional threshold are both deemed to be £100,000 so the unused percentage is 100%.
Step 2. Multiply the percentage of additional threshold that was unused when the first of the couple died by the maximum additional threshold available at the time of the survivor’s death.
This gives you the sum available to transfer.
Philip died in 2015 and left his entire estate to his wife. This was before the additional threshold was available.
So, when he died, the additional threshold could not have been used. That means 100% is available to transfer to his wife’s estate.
His wife dies on 30 July 2019 and leaves all her estate, including a home worth £400,000, to her daughter.
Having died in the tax year 2019/20, the maximum available additional threshold is £150,000.
Her executor makes a claim to transfer the unused additional threshold from Philip’s estate.
So, the total available additional threshold for Philip’s wife’s estate will be £300,000 (£150,000 + (transfer of 100% x £150,000)).
Transferring any unused additional threshold
The estate’s personal representative will need to give details of the amount due and supporting information on the IHT return.
They will make a claim to transfer any unused additional threshold from the estate of a late husband, wife or civil partner.
They will also need to make a claim for any additional threshold as a result of downsizing selling or giving away of the home before the person died.
As the additional threshold and basic IHT threshold are not linked, the percentages transferred can be different.
This means that even if all of the basic IHT threshold was used when the first of the couple died, you can still transfer the unused additional threshold.
The percentage of transferred additional threshold will be limited to 100%.
This means that if an individual has had more than one spouse or civil partner and they make a claim to transfer the unused additional threshold from each one, the total transferred additional threshold can’t be more than 100% of the maximum available amount.
We know this tends to get complicated and it’s something that people do forget about or don’t tend to talk about, so we can help. I’m happy to arrange an introduction via call, Skype or face 2 face, just let me know and of course, as always, everything is private and confidential that is discussed.
All the best
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Source: International Adviser