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Married couples and civil partners will soon be able to inherit up to £1 million tax-free under new rules that allow you to avoid inheritance tax on larger estates.

Under changes introduced for the 2019-20 tax year, you can avoid IHT on estates up to £950,000, but this is due to rise further to a round £1 million from 2020-21.

The important element is the residence nil-rate band, also known commonly as the inherited property allowance, which waives IHT on property left to a direct descendant such as a child or grandchild.

Allowance limit set to rise

For 2019-20 this allowance is set at £150,000, and is due to rise to £175,000 next year, and track the consumer prices index (CPI) rate of inflation thereafter.

The allowance is transferable to a surviving spouse, giving couples a combined £350,000 nil-rate allowance on property left to their children and grandchildren in 2020 onwards.

On top of this, each individual also receives the usual £325,000 tax-free allowance on their estate, putting a further £650,000 in total into married couples’ and civil partners’ estates.

Together with the inherited property allowance, this currently means married couples and civil partners with children and/or grandchildren can leave up to £950,000 tax-free, while from next April this rises to an even £1 million.

Factors to consider

In terms of IHT planning, there are a few significant factors to consider, including:

  • The law currently does not allow tax-free IHT allowances to be transferred to cohabiting but unmarried partners – so you will need to enter into a marriage or civil partnership to pool your allowances in this way.
  • The inherited property allowance only applies to direct descendants – children, grandchildren and so on – and not to other relatives like siblings, nephews and nieces.
  • Because of this, if you have stepchildren, it is important to ensure they will be able to receive the full IHT tax-free allowance in the event of your death.

With these legal technicalities resolved, all couples with children should soon be able to avoid IHT on million-pound estates, with the usual charge of 40% applied on the remainder (subject to other exemptions like charitable legacies etc).