Love and Legacy: How your love story could make a difference to your Inheritance Tax bill

But when you think of popping the question, I bet you’re not including “think of the tax benefits!” as part of the proposal. It’s probably not even crossed your mind, but given the changes to Inheritance Tax and pensions, should it?

Inheritance Tax (IHT) is a tax that comes into play when you pass away, and it applies to the overall value of your estate. This includes everything from property to possessions and money. If the value of your estate goes above a certain threshold, that's when the tax kicks in. Currently, UK Inheritance Tax only applies to UK-domiciled (and deemed domiciled) individuals and is charged on worldwide assets, with non-domiciled individuals only subject to Inheritance Tax on assets in the UK. Changes to how non-domiciled individuals will be taxed will come into effect from 6 April 2025.

For individuals, the Nil Rate Band threshold is currently set at £325,000. This means that any part of your estate above this amount is taxed at 40%.

Now, if you’re married or in a civil partnership, there really are tax benefits! You can inherit the Nil Rate Band of your spouse if you inherit their assets. So, you can pass the tax-free threshold on and have a combined Nil Rate Band of £650,000.

The same can happen with the Residence Nil Rate Band, which is £175,000 if leaving your home to a direct descendant. If that’s transferred between spouses, that’s a total of £350,000 of Residence Nil Rate Band.

Adding these Nil Rate Bands together gives a total potential tax-free estate of £1,000,000. How romantic!

The good news is that anything you leave to your spouse or civil partner—whether it’s gifts given during your lifetime or assets passed on after you’re gone—won't be subject to Inheritance Tax. It’s a comforting thought knowing that your loved ones can inherit without extra tax burdens.

However, if you are a couple that aren’t married or in a civil partnership, you aren’t able to pass these allowances to each other. Not only that, but Inheritance Tax could apply on the first death, reducing what could be passed on to your partner.

And if that isn't enough to encourage you to "put a ring on it" recent changes proposed by the UK Government to bring pensions into your estate for Inheritance Tax purposes could.

Up until now, pensions have been a great way to plan to pass on assets to your loved ones without worrying about Inheritance Tax. Beneficiaries could receive them tax-free, with just Income Tax to consider when they start accessing the funds, depending on the age of the original owner when they died.

However, it’s changing from April 2027. Your pension will become part of your estate and will be subject to Inheritance Tax. For individuals, there’s a chance that both Income Tax and Inheritance Tax could come into play, which could mean you pay a double tax charge totalling 52%-67%, sometimes higher.

The good news is that for married couples and civil partners, you should still be able to transfer your pension tax-free between one another if one spouse passes away. This means you can help protect your loved ones from facing double taxation.

The bad news for unmarried couples is that the tax issue on first death is made worse by including pensions.

Whether you’re married, in a civil partnership or not, and have even moderate savings or assets, it’s a great idea to get some tax and financial planning advice. This can help you find ways to reduce your inheritance tax (IHT) both now and later, so you can pass on as much as possible to your family.

With a little planning, you and your partner could transfer up to £1 million to your loved ones without having to worry about IHT, with options to minimise any tax on the excess. It’s all about making sure your hard-earned resources go where you want them to - your family! 

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