My husband and I were both widowed: Can we use our late spouses’ inheritance tax

My husband and I were both widowed when we married. Neither of us used our late spouse’s tax allowance on their passing.

Does this mean we will have double the allowance for inheritance tax when we pass on inheritance to our children?

Is there a way that we can do this if not?

We both have children with our late spouses, but not with each other. M.L, via email

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This reader and their husband are both widows – can they use up their former partners’ tax allowances?

Harvey Dorset, or This is Money, replies: Inheritance tax bills can prove a costly business, with the levy charged at 40 per cent on anything above the relevant tax-free allowance that applies to each case.

But a couple still together at the time when one of them dies can potentially pass on up to £1million tax-free, depending on their circumstances.

As a result, it is important to mitigate the effects of inheritance tax as and where you are able to. It is here that extra residence-based allowances and transferable allowances from spouses can be useful.

In your case, you have quite a specific set of circumstances that means it isn’t as simple as one of making use of spousal transfer when the other dies, as you both have previously been widowed.

In order to understand how you might be able to make use of the unused allowances from your previous marriages, This is Money spoke to two financial advisers.

Luis Amato says additional allowances are only available if the NRB and RNRB were not used when your late spouses passed away

Luis Amato, private client advisor at HFMC Wealth, replies: You and your husband may be able to benefit from unused allowances from your late spouses, but this depends on whether these allowances were utilised at the time of their deaths. Equally, you would need to take expert advice on ensuring your wills are structured appropriately to take advantage of this opportunity.

Firstly, let me provide you with an overview of what the current allowances are:

1. Nil rate band (NRB)

• This is the basic amount of wealth and assets that a person can pass on without paying inheritance tax. It is currently £325,000 per person.

• If your late spouse did not fully use their NRB, the unused portion can be transferred to your respective estates.

• This means you could potentially have up to £650,000 – your own allowance, plus your late spouse’s.

2. Residence Nil Rate Band (RNRB)

• This gives someone an extra inheritance tax allowance, currently £175,000 per person, provided that their main residence is passed to direct descendants (i.e. children or grandchildren). This, plus the standard £325,000 allowance, means they can pass on £500,000 tax-free. 

• Unused RNRB from your late spouses may also be transferred, meaning each of you could potentially have £350,000 in RNRB. 

• However, RNRB is reduced if an individual’s estate exceeds £2million, tapering at a rate of £1 for every £2 over this threshold.

Total potential allowances

If neither of your late spouses used their allowances, your potential combined IHT-free threshold could be:

• £650,000 (NRB) + £350,000 (RNRB) = £1million per person

• £2million combined

However, 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.

Practical steps

1. Confirm unused allowances

• Your late spouses’ estates need to be reviewed to determine if any of their NRB or RNRB was used at the time. A solicitor or financial planner can help assess this.

2. Review and update your wills

• To fully benefit from these allowances, it is essential that your wills are structured correctly. This includes ensuring assets are passed in a way that makes full use of available allowances, particularly the RNRB if applicable.

• Good legal advice is crucial 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 £2million, consider ways to reduce the taxable estate to avoid losing the RNRB through tapering. This might include lifetime gifting strategies or setting up trusts.

4. Ensure the allowances are claimed on second death

• When the surviving spouse passes away, their executors must formally apply to HMRC to transfer any unused NRB and RNRB. Proper record-keeping and legal guidance will help ensure this process runs smoothly.

Whilst it is a great opportunity to make use of additional allowances, you should also consider your lifetime requirements and how you could be impacted if one of you pre-deceases the other. 

Having a well thought out plan whilst considering several different scenarios is paramount.

I would strongly recommend speaking to a financial planner alongside a quality solicitor to ensure your wishes are set up correctly and tax efficiently.

Natalie Donnell says you need to make your wishes explicit in your wills so that there can be no room for misinterpretation

Natalie Donnell, independent financial adviser at Flying Colours, replies: This is an interesting question that is potentially relevant to greater numbers of people as we see more and more blended families and second marriages.

In short, you can only inherit a nil rate band (NRB) of £325,000, and residential nil rate band (RNRB) of up to £175,000 once.

So, if you inherit both the NRB and RNRB from your previous spouse you cannot then leave your own nil rate band to your spouse in your second marriage.

However, in a situation where you had elected not to receive the NRB or RNRB from your previous spouse on their death, you would be liable for IHT for any amount over £325,000 and £175,000 for the residential nil rate band at the point of their death.

You could then pass both your NRB to each other in your second marriage.

The key point to make here is that as a couple, you need to decide if you are going to use the first or second marriage for NRB purposes.

In this situation I would advise using the first marriage. This is because each of you individually would then have the combined NRB and RNRB of your deceased first spouse as well as your own – totalling £1million, or £2million combined.

That would mean that each of you could pass the combined NRB and RNRB of £1million down to your own children. 

So, if your estate is below the value of £1million there would be no Inheritance tax for your children to pay. And if your estate value is over £1million your children would only have to pay inheritance tax of the value over £1million. 

The inheritance tax payable is 40 per cent of the value over £1million.

However, it’s important to note that this relies on you both keeping your finances and assets separate, not passing them to each other on death, and instead passing them down directly to your own children.

This would work on a practical level by being ‘tenants in common’ for any property owned. That way, on the first death 50 per cent would be passed to the children of the deceased and the remaining 50 per cent kept by the surviving spouse.

Please note that any jointly held bank accounts and/or savings accounts are normally set up under the ‘joint tenants’ meaning they would automatically pass to the surviving spouse. However, you can specify with the bank to have the account set up under ‘tenants in common’ like you would with your main property, so that 50 per cent passes to the surviving spouse and 50 per cent to your children.

Pensions and investments tend to be in individual names, making life more straightforward there. However, with your pensions you do need to name the beneficiary by using an ‘expression of wish’ which most pension providers can provide. Without this, the allocation of the funds and recipients would be at the discretion of the pension provider/trustees.

Also, you need to make your wishes explicit in your wills so that there can be no room for misinterpretation.

It’s important to be aware that this is specific advice in what can be a highly complicated area, and that you should always consult a qualified adviser who will be able to advise you on how best to organise your affairs.