Death & Taxes With A Happy Ending

Solicitors are often instructed to provide advice about how to end marriages and how to get the best outcome when it comes to divorce, nevertheless, getting married still carries many legal advantages. In his latest blog, Wills and Probate Solicitor, Matt Kelly discusses……

In 2018 Sir Ken Dodd, 48 hours prior to him passing away, married his life-long partner of 40 years. Whilst formally recognising and celebrating their love for each other, the exchanging of vows also meant a huge inheritance tax saving for his estate, possibly a tax saving of over £2 million.

Not all marriages would result in such a large inheritance tax saving though a simple example helps demonstrate where the tax saving might occur on the death of the surviving spouse as opposed to the first death:-

Mr. Smith and Miss. Jones are a long-standing couple who have never got round to getting married. They have no children, either together or from prior relationships, though Mr. Smith has a favoured niece, Sarah, and Miss. Jones has a favoured nephew: Nigel.

Mr. Smith and Miss. Jones have mirror wills leaving anything to each other on the first death and then equally to Sarah and Nigel on the survivor’s death. Mr. Smith and Miss. Jones are worth £600K in total with each holding assets of £300K each.

Scenario 1 – Mr Smith & Miss Jones Remain Unmarried

Mr. Smith dies leaving his estate of £300K to Miss. Jones. The spousal exemption does not apply, though there is no inheritance tax to pay as Mr. Smith has a full nil rate band of £325K (sum free from Inheritance Tax) available on his death. Sadly, Miss. Jones dies three years later and is worth £600K at the date of her death.

Inheritance Tax is due:-

Miss. Jones has her own full nil rate band of £325K to set against her estate of £600K reducing her taxable estate to £275K which is subject to IHT at 40% meaning Inheritance Tax of £110,000 is due.

Scenario 2- Mr Smith & Miss Jones Got Married

Mr. Smith and Miss Jones married a few months before Mr. Smith died so Mrs. Smith inherited Mr. Smith’s entire estate of £300K as his spouse. The spousal exemption applies to Mr. Smith’s entire estate, regardless of its value, which means Mr. Smith’s nil rate band rate, of £325K, is not used on his death.

No Inheritance Tax is due:-

When Mrs. Smith dies three years later, worth £600K, her nil rate band of £325K applies and the unused nil rate band (also £325K) of her late spouse, Mr. Smith, transfers across to the estate of Mrs. Smith.

As Mrs. Smith’s estate of £600K doesn’t exceed the total of the combined nil rate bands of £650K there is no Inheritance tax to pay, effectively saving £110,000.00 of Inheritance Tax through the act of marriage and the application of the spousal exemption.

Please contact me for advice regarding Wills and estates though no advice will be offered about whether getting married is a generally a good idea!

Email: m.kelly@timms-law.com Telephone: 01283 561531.

Matt Kelly
July 2021