Everyone has the same basic tax-free allowance before they must pay inheritance tax (IHT). The current threshold is £325,000. If the threshold has not been fully used when the first person in a marriage or civil partnership dies, it can be transferred to the surviving spouse or civil partner.
The basic tax-free allowance available when a spouse or civil partner dies can be as much as £650,000 if none of their £325,000 threshold was used when the first partner of the couple died.
The percentage of the threshold that was not used when the first partner died increases the basic threshold available for the surviving partner’s estate.
You can only transfer the threshold if:
- the couple were married or in a civil partnership when the first death occurred;
- the request is sent to HMRC within two years of the death of the surviving spouse or civil partner.
To work out the percentage of unused threshold available to transfer, the threshold must be used at the time the first spouse or civil partner died.
An excepted estate is an estate where no inheritance tax is due and a full inheritance tax account on form IHT400 is not needed. There are 3 types of excepted estate: low value estates, exempt estates and foreign domiciliaries.
HMRC has given two examples of how the system works in different scenarios.
Example 1
Carole dies leaving an estate worth £600,000. She leaves £130,000 to her children and the rest to her husband Simon. The threshold in use at the time was £325,000.
The £130,000 left to the children would use up 40% (£130,000 ÷ £325,000 x 100) of the threshold, leaving 60% unused.
When Simon dies, the threshold is still £325,000. His available threshold would increase by the unused percentage (60%) to £520,000 (£325,000 x 60% +£325,000).
If Simon’s estate is not worth more than £520,000 there’ll be no inheritance tax to pay when he dies. Inheritance tax would be payable on anything above £520,000.
Example 2
David dies leaving an estate worth £800,000. He leaves £50,000 to his friend Sandra, and the rest to his civil partner, Mark. The threshold in use at the time was £250,000.
The £50,000 left to Sandra would use up 20% (£50,000 ÷ £250,000 x 100) of the threshold, leaving 80% unused.
When Mark dies, the threshold is £325,000. Mark’s available threshold would increase by the unused percentage (80%) to £585,000 (£325,000 x 80% + £325,000).
If Mark’s estate is not worth more than £585,000 there will be no inheritance tax to pay when he dies. Inheritance tax would be payable on anything above £585,000.
Make a claim to transfer unused basic threshold
The way to make a claim depends on:
- the type of estate you’re dealing with;
- the date the person died; and
- whether you transfer less than the full threshold.
For deaths on or before 31 December 2021 you can only make a claim to transfer the full unused threshold with form IHT217.
If you are transferring less than the full unused threshold, you will no longer qualify as an excepted estate. You must make a full return of estate with form IHT400 and form IHT402.
For deaths on or after 1 January 2022 you:
- can transfer any unused amount; and
- should claim when you apply for probate.
If the person who died lived in Scotland use form C1.
If you must make a full return of the estate you will need to transfer unused threshold with form IHT400 and form IHT402.
