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Q: Can a widow, who has remarried, use 3 nil rate bands in their inheritance tax planning? A: Yes...

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Q: Can a widow (or widower), who has remarried, use the nil rate band from their deceased first partner in their inheritance tax planning - effectively meaning they have up to 3 nil rate bands? A: Yes – provided that (1) the widow’s Will is drafted to allow this and (2) the late first partner had not already not used his or her nil rate band

Widows: don’t overlook any unused nil rate band from your first spouse

With the March 2021 Budget announcement that the value of the inheritance tax threshold (nil rate band) will be frozen until April 2026, more estates will be progressively dragged into paying inheritance tax (IHT). So it is important to plan ahead and make use of all available tax reliefs.

If you are a widow or widower who has remarried, it is important that your new Will utilises any unused nil rate band from your first spouse to save your estate a lot of inheritance tax (potentially up to £130,000).

Case study showing the benefit of planning ahead

Our case study illustrates how this form of inheritance tax planning is only possible through an appropriately drafted Will. A poorly drafted Will (or having no Will at all) could overlook a simple planning technique that could save the beneficiaries a six figure sum in inheritance tax:

  • Ken’s first wife, Valerie died in 2010. Ken remarried in 2015 to Deirdre. Ken had two children with his first wife Valerie and a daughter with Deirdre. Ken’s estate is likely to pay inheritance tax so he is reviewing his Will in order to identify any tax planning that he could undertake to limit the inheritance tax that his second wife and children would have to pay after his death.
  • Ken’s first wife, Valerie left everything to Ken when she died in 2010 and her estate passed free of inheritance tax to Ken due to the spouse exemption. Valerie did not make any gifts in her lifetime and so her executors did not use her nil rate band (which in 2010 was £325,000 as it is now in 2021).
  • Ken and Deirdre married in 2015 and arranged mirror Wills leaving their estates to each other absolutely on the first of their deaths and then onto a discretionary Will trust to be split amongst their children and step children.
  • Neither Ken or Deirdre have made any lifetime gifts, so currently, following the first death of either Ken or Deirdre, the entire nil rate band of £325,000 of the first of them to die will pass to the other as they are married. Therefore, on the second death, the estate of that person will have a combined nil rate band of £650,000 (assuming no lifetime gifts are made).

This leaves the £325,000 nil rate band of Valerie unused and an opportunity for Ken to save his estate up to £130,000 in inheritance tax.

So what can Ken do to use Valerie’s nil rate band in order to save inheritance tax in his estate?

Ken has the opportunity to leave a sum equal to Valerie’s nil rate band (ie £325,000) completely free of inheritance tax to somebody other than his second wife Deirdre. This is likely to be his children, but it doesn’t have to be. Ken has the option of leaving this £325,000 as a cash legacy or in trust for his children and future generations, but either way this planning allows him to reduce his estate by £325,000 without incurring any inheritance tax (thus saving up to £130,000 in inheritance tax).

Is there anything else that Ken should consider in his new Will?

Often second marriages bring with them the added dimension of step-children and, potentially, step-grandchildren. We develop our case study further to highlight other issues to consider and how careful planning can assist.

  • Ken had two children with Valerie (Peter and Susan) and a daughter, Tracy, with his second wife Deirdre. As Ken has children from his first marriage, he may wish to consider how to ensure they are guaranteed to receive a share of his estate.
  • Under his current Will, if Ken dies before Deirdre, his entire estate will pass to Deirdre absolutely, which means that on Deirdre’s subsequent death her entire estate will pass under her own Will. 

From Ken’s point of view, this arrangement risks a scenario whereby Deirdre could change her Will after her death which might not provide for her step-children, Peter and Susan (Ken’s children from his first marriage) and so they would not receive any portion of Ken’s estate.  If Deirdre remarries, the mirror Will she had with Ken would be automatically void, and unless she drafts another Will, all her estate (including the portion that she inherited from Ken) would pass to her new husband and any of her own children (ie Tracy plus any further children she has) and would bypass Peter and Susan entirely.

Drawing on professional advice to understand your options

There are multiple options open to Ken to plan for these scenarios and ensure Peter and Susan remain entitled to a portion of his estate. A common planning structure used by many married couples to anticipate this exact scenario is a Will that puts the entire estate into a discretionary Will trust that benefits all children and grandchildren and includes a life interest for the surviving spouse to ensure he or she can continue to live in the family home and enjoy the assets of the marriage during their lifetime. This would leave the surviving spouse to structure his or her own Will however they wish and provide the peace of mind that the capital of the estate will benefit all the children and grandchildren regardless how the surviving spouse structures their own Will.

Hopefully our case study highlights the value of planning ahead and engaging with specialist professionals to ensure your plans maximise any available tax reliefs. Our specialist Private Client lawyers look at your circumstances from a legal perspective and typically work alongside tax and financial advisers to ensure that your plans make sense ‘in the round’.

Our articles are intended for general information purposes only and are not a substitute for professional advice tailored to your specific circumstances. We are always very happy to discuss any plans, issues or concerns you may have and to clarify how we might be able to help. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.