Inheritance Tax Calculator for Married Couples and How To Pay Less

Inheritance Tax (IHT) plays a crucial role in estate planning.

It can be challenging to determine when it applies and the rate at which it’s charged.

With our guide, navigating the complexities of IHT becomes more manageable.

Read on through this week’s Friday Tax Tip to learn about the Inheritance Tax Calculator for Married couples, and how to enhance your Tax Efficiency.

Inheritance Tax Calculator for Married Couples

(Read Time: Approx. 6 minutes)

Topics Discussed:

  • How to navigate and calculate Inheritance Tax (IHT) for married couples.
  • Mitigating potential Inheritance Tax liabilities through gifts, trusts, and charitable donations

What is Inheritance Tax (IHT) and when is it charged? 

IHT is not simply a tax paid on the value of someone’s estate at the time of their death.

IHT is charged on the value transferred by a ‘chargeable transfer’. 

  • A chargeable transfer is a transfer of assets made by an individual in life or death, which results in the value of their estate. Their assets chargeable to IHT being reduced.
  • A chargeable transfer can arise both during an individual’s lifetime, for example on a Transfer into a trust, and on their death, when their estate is transferred to their beneficiaries. 
  • Some Transfers of value are exempt from IHT at the time they are made. Others are Potentially exempt and will only become chargeable if they are not survived by seven years. 

An individual’s Domicile may limit the territorial scope of IHT charged. 

  • A UK domiciled individual is liable to IHT on worldwide assets, whereas someone with a non-UK domicile is only liable to IHT on UK situs assets. 

Many trusts are also subject to IHT charges.

These can arise every ten years as well as when assets leave the trust.

IHT on an individual’s death

There are three types of transfer which may become subject to IHT (or additional IHT) when an individual dies: 

  • A deemed chargeable transfer in relation to the individual’s death estate (discussed below). 
  • Potentially Exempt Transfers (PETs) made in the seven years prior to death (outside the scope of this note). 
  • Chargeable Lifetime Transfers (CLTs) made in the seven years prior to death (outside the scope of this note). 

Whether any IHT is payable on these transfers will depend on values and the availability of reliefs and exemptions. 

How do I calculate IHT on a death estate?

When an individual dies, they are deemed to make a chargeable transfer, for IHT purposes, which is equal to the net value of the assets in their estate at the time of their death.

In order to calculate the IHT payable on an estate the steps below should usually be followed.

There may be more points to consider for some estates, depending on the nature of the assets held and wider facts. 

Step 1: Value the assets of the estate

All of the assets that the deceased was beneficially entitled to need to be valued at their open market value at the date of death.

A person’s assets might include:

  • Their home.
  • Other properties, land or buildings.
  • Cash, and money in banks and building societies.
  • Interests in businesses such as sole trade businesses and partnerships. 
  • Stocks and shares.
  • Household and personal items, including furniture, antiques, paintings and jewellery. 
  • Cars, caravans or boats.
  • Foreign assets (for UK-domiciled individuals)
  • Amounts owed to them, for example, wages, tax repayments, refunds and loans made to other people. 
  • Payments made on their death, such as life insurance payments or Lump sum death benefits from a pension.

There are special valuation rules which apply to: 

  • Jointly owned assets, depending on whether owned as joint tenants or tenants in common. 
  • Using an Inheritance Tax calculator for married couples can yield different results, which will be explored further in this article.
  • Quoted shares and units in authorised unit trusts.
  • Related property (usually property owned by a spouse or civil partner, or in some cases a charity, charitable trust or certain political, national or public bodies). 

Deemed assets of the deceased must also be included in the value of the estate. These include:

  • Assets falling within the Gift With Reservation Of Benefit (GWROB) rules. 
  • An Interest In Possession (IIP) in settled property. 

Step 2: Deduct liabilities

Next, a deduction for allowable liabilities can be made. These typically include: 

  • Mortgages, loans, credit cards and overdrafts. 
  • Household bills and bills outstanding for goods or services. 
  • Income Tax and Capital Gains Tax to the date of death. 

Reasonable funeral expenses may also be deducted. 

Where a loan is secured on a particular asset, its value will usually be deducted from that asset’s value.

This is subject to Anti-avoidance rules, which apply where the debt in question is not repaid or was used to acquire, maintain, or enhance the following. 

  • Excluded property.
  • Assets qualifying for Business Property Relief or Agricultural Property Relief (see below). 

Step 3: Deduct exemptions and reliefs 

From the value arrived at following Step 2, deduct any exemptions which are being claimed. These might include transfers on death to: 

  • The individual’s spouse or civil partner.
  • Note the restriction for Transfers to non-UK domiciled spouses and civil partners. 
  • Registered charities and certain Community Amateur Sports Clubs (CASCs).
  • Qualifying political parties. 
  • Certain housing associations. 
  • Some national bodies, such as the National Gallery and the British Museum.

Next, deduct the value of any reliefs being claimed, for example:  

  • Business Property Relief (BPR).
  • Agricultural Property Relief (APR).
  • Woodlands Relief. 
  • Relief for Heritage assets. 

Step 4: Deduct nil rate bands

a) Work out, and deduct, the value of both of the

  • Nil Rate Band (NRB) 
  • Residence Nil Rate Band (RNRB) 

Ensure that the NRB is reduced by the value of the chargeable transfers made by the deceased in the seven years before their death: 

  • Not all transfers in the seven years before death will be chargeable.
  • Some may be covered by exemptions, such as gifts of Normal Expenditure Out of Income or the Annual exemption. 
  • Note that the value of the RNRB is tapered for estates exceeding £2m in value.

b) Work out, and deduct, the value of available Transferable Nil Rate Bands

  • Unused Transferable Nil-Rate Band (TNRB) or a transferable Main Residence Nil-Rate Band (RNRB) can be used from a pre-deceased spouse or civil partner.
  • It is possible for some deceased individuals to have total NRBs and RNRBs of £1m. 
  • Check the details of the pre-deceased’s estates on death to determine the amounts.

The result of this step is the value chargeable to IHT. 

Step 5: Calculate the IHT on the estate

Calculate the IHT liability on the value chargeable to IHT from Step 4. 

  • The ‘Death rate’ of IHT is 40%. 
  • A lower 36% rate of IHT can apply where 10% or more of the net estate has been left to a charity.

Step 6: Calculate reductions to IHT payable 

Quick Succession Relief: If, in the five years before the individual died, they inherited money or assets from another person’s estate on which IHT was paid, calculate and deduct Quick Succession Relief (also known as Successive Charges Relief).

Double Tax Relief: If overseas property is subject to an equivalent tax in another country, Double Tax Relief may be available for all or part of the overseas tax paid, either under the terms of the relevant tax treaty, or, via unilateral relief. Deduct this from the Step 5 value. 

The result should be the IHT payable on the estate.

In some cases, some, or all of this, may be payable in instalments.

Calculating Inheritance Tax for Married Couples

For many, the realm of inheritance tax (IHT) becomes especially relevant when considering the joint assets of a married couple.

The Inheritance Tax calculator above can be used for married couples in the same way.

However, there are some further elements which should be considered when taking marriage into account.

Whilst these extras steps might initially appear daunting, the process becomes clearer when broken down:

Determine the Combined Value of Estates: Begin by calculating the total value of both partners’ assets, which encompass property, investments, savings, and other valuables.

Deduct Outstanding Debts: Subtract any outstanding liabilities, such as mortgages or loans, from the combined estate value.

Leverage Any Unused Tax-Free Allowance: Every individual is entitled to a tax-free allowance. If one partner did not exhaust this allowance upon their passing, the surviving partner could inherit the unused portion, potentially doubling the tax-free assets.

Calculate Tax on the Overlapping Amount: Post all allowances and reliefs, compute the 40% tax on the portion of the estate that surpasses the combined tax-free threshold.

Explore Additional Reliefs: Some couples might be eligible for extra reliefs, like the residence nil rate band, beneficial if they bequeath their family home to direct descendants.

It’s imperative to seek professional advice when evaluating specific inheritance tax calculations for married couples, as personal circumstances and regulatory changes can influence the final calculations.

How can IHT be mitigated?  

There are several avenues to minimise Inheritance Tax (IHT).

These can include making gifts during your lifetime, setting up trusts, or designating charities in your will.

It’s essential to approach these strategies with careful consideration and professional guidance.

If you’re looking to minimise your IHT liability, contact us at Tax Expert for further details.

We offer custom guidance and help you understand the details of Inheritance Tax optimisation.

Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.

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Kind regards,

Ilyas Patel