Inheritance tax when your second parent dies, what do you do?
Inheritance Tax (IHT) can be a complex and emotive issue, and for many families it comes into sharp focus on the death of a second parent, rather than the first.
Understanding how IHT works after the death of your second parent and arranging affairs accordingly can save you from higher stress and higher tax at a difficult time.
Here’s what you need to know.
IHT is levied at 40% on the estate of a deceased person over a certain threshold
Asset can be passed between couples who are married or in a civil partnership without IHT being triggered, so the bill often comes due on the second death
Many estates don’t pay IHT and there are steps you can take to minimise the amount of your estate that is swallowed by the taxman
Why the second death is the key moment
When the first member of a couple dies, there’s often very little mention of inheritance tax.
That’s because, as long as the couple have been married or in a civil partnership, assets can be transferred between them without any IHT being payable.
This is the case whether the person who passes away has made a will or not.
If there is no will, in English law the remaining (married) partner will inherit the entire estate.
Given that around half the population is estimated not to have made a will, this is a relatively common situation and means that many families do not find out about the tax burden that the family will face until the second parent dies and the estate is distributed further.
It’s worth noting that the IHT exemption only exists when the couple are married or in a civil partnership.
If they are not then full IHT becomes payable on the death of the first member of a couple.
What to expect when your second parent dies
When the second member of a couple who are married or in a civil partnership dies, the taxman will assess the full estate for inheritance tax purposes.
In many cases, there will still be no IHT to pay. At the last count, fewer than 5% of estates paid the tax, although this is forecast to rise in coming years.
To calculate if any tax is due, the value of the whole estate is added up. This includes the value of property, any investments and the cash and possessions owned.
From April 6, 2027, your pension will also be included in this calculation, which could bump up the value of the estate significantly.
Allowances available
Before a final IHT bill is decided, the executor of the estate will consider the different thresholds and exemptions that can bring down the final bill.
The most significant of these are the nil rate band, below which no IHT is due, and the residence nil rate band, which increases the amount of your estate you can pass on tax free if you are passing your main residence to a descendant.
The second member of a married couple can inherit any unused allowances from the first, significantly increasing the amount they can pass on.
At present the thresholds for this are as follows
Nil Rate Band
£325,000 per person
Can be passed to the surviving spouse on death
Potential combined allowance of £650,000 per couple
Residence Nil Rate Band
£175,000 per person
Can be passed to the surviving spouse on death
Applies only if main residence is left to direct descendants
Potential combined allowance of £350 per couple.
However, if your property is worth over £2m, the amount of the residence nil rate band begins to be taken away from you at a rate of £1 for every £2 of value over £2m, which means that if your home is worth a lot you may lose the extra allowance entirely.
Gifts to charity can further reduce IHT paid, as if you give more than 10% of the value of your estate to charity the IHT rate on the rest of the estate drops to 36%.
How this works in practice
The rates above mean that some couples can leave assets worth up to £1m on death without any IHT being payable.
For example, if a married couple had a house worth £600,000 and savings and possessions worth £200,000, they’d pay no IHT as the surviving spouse would inherit their partner’s allowances.
If the same couple were unmarried but owned everything equally, there would be IHT to pay, however.
The first member of the couple passing on an estate worth £400,000 would leave an IHT bill of £30,000 (40% of the £75,000 value of the estate over £325,000), if the house and all other goods were left to the unmarried partner.
The second member of the couple would leave IHT to pay of £190,000 if they passed their estate on to anyone other than a direct descendant, or £120,000 if they left their main home to their child or grandchild.
In cases like this, marriage or civil partnership can make a huge difference to an IHT bill.
Taking steps to decrease the bill
A financial adviser can help you and your family take steps to decrease their IHT bill.
These could include:
A gifting strategy to ensure money is given away before death in line with HMRC gifting rules
Putting property or money into trust (this is a complex area but you can find a professional on Unbiased)
Writing life insurance into trust to pay for funeral expenses
Reviewing wills so that money is passed down tax efficiently through the family
This specialist advice is even more important if your family has any complex situations which may include:
Divorced and/or remarried parents
Businesses or agricultural land as part of the estate
Unmarried couples with no transferrable allowances.
It is possible to take some steps even after a parent has died by using a Deed of Variation to change the will with all the beneficiaries’ agreement. This can help you to manage IHT liability
Steps to take now
Whatever your family situation, thinking about IHT in advance could bear dividends for those who want to leave a legacy.
Couples can pass on up to £1m tax free, but only if they understand the way the tax rules will affect their family and structure their legacies accordingly.
Marriage, or civil partnership, is one deciding factor that can make a huge difference, as it means that allowances can be passed on, but IHT will still be calculated on the death of a second parent.
A good giving strategy can also make a huge difference.
Any gifts you make seven years before death are IHT exempt, while gifts from surplus income with a proper paper trail can also be made without attracting the tax.
Get expert financial advice
Understanding Inheritance Tax can feel complicated, but planning ahead can make a big difference to how much you leave for your loved ones.
The rules around tax-free allowances, gifting, and trusts can help you reduce your potential tax bill.
A qualified financial adviser can offer clear, expert help that’s right for your family's circumstances.
They can work with you to create a straightforward plan, making sure your money goes to the people you care about.
Let Unbiased connect you with an experienced adviser to help secure your family’s financial future.
)