There is a general exemption under Inheritance Tax for all goods and property transferred to your spouse or civil partner upon your death. A spouse is deemed to be anyone to whom you are lawfully married, including valid polygamous marriages. It also includes married couples or civil partners who are separated. However, it does not apply to unmarried persons who are living together, even if they are recognised as common law spouses under Scots law. It also excludes parties to a bigamous marriage and people who were divorced prior to the date of death (apart from court settlements on divorce as described below). This exemption is without limit (apart from non-domiciled spouses as shown below) and can apply to the whole of your estate upon death and also to any lifetime transfers. However, there are a few unusual situations to take note of where this exemption may be restricted or compromised.
If your spouse is not domiciled in the UK, the IHT exemption is restricted to £55,000 (a limit frozen since 1974!). However, this will not apply if you are not domiciled in the UK yourself and it will not apply if both you and your spouse are non-UK domiciled. This restriction often concerns people with spouses (or civil partners) born outside the UK. However, there is usually nothing to worry about if your spouse (or civil partner) has made the UK their permanent place of abode. Provided they have no clear intent to return permanently to their country of birth (or any other country) at some point in the future, they would normally be deemed to have made the UK their domicile of choice. Please see our information sheet on Domicile for further details. It is also worth noting that the £55,000 exemption may be lost if the deceased made potentially exempt transfers to his non-domiciled spouse (or civil partner), even if they were more than 7 years before death. That is because the spouse exemption is always used to exempt such gifts immediately they are made, so it is irrelevant how long the donor survives afterwards. Normally this would not affect the beneficiary as the exemption is unlimited but in the case of non-domiciled spouses it can have an unfortunate effect.
Naturally the spouse exemption does not apply to divorced spouses or ex-civil partners. For this purpose, it is the date of the decree absolute that is relevant, as divorcing couples are deemed to remain married until this point. However, the spouse exemption can still be claimed after this date for transfers taking place under a court order provided they are for the purpose of family maintenance and are not intended to provide gratuitous benefit to the receiving party. In practice the Revenue will take a lenient view on this.
Sometimes the terms of a will may provide for a spouse or civil partner to inherit only on certain conditions, for example that he/she makes a transfer of value to a third party within a certain period of time. If the condition is not satisfied within 12 months of death, the spouse exemption will not apply. However, it will apply provided that the condition is satisfied within 12 months of death, subject only to restriction for any amounts transferred by the spouse or civil partner to a chargeable beneficiary. There may also be a restriction to the spouse exemption if property is transferred to a discretionary trust and the trustees are able to vary the amounts payable at a future date to the spouse or civil partner. The surviving spouse or civil partner may often be given an interest in possession, such as the right to live in a property until death or to receive rent on a let property. If the interest in possession is terminated before the spouse or civil partner dies, there may well be an IHT liability on the value of property leaving the trust.
If the terms of a will provide that property only passes to a spouse or civil partner at a later date, for example upon the termination of a period of time or upon the occurrence of a particular event, the property does not pass absolutely and the spouse exemption cannot be claimed. However, there is an important exception to this. It is common for wills to include survivorship clauses whereby property only passes to the spouse or civil partner if they survive for a certain length of time after the death of the first spouse or civil partner. This is normally aimed at ensuring that property does not get taxed twice by having to pass through 2 estates in the event of one spouse surviving the other by only a few days or weeks following a fatal accident or illness. The exception allows the spouse exemption to be claimed in this situation provided that the required period of survival does not exceed 12 months. Actually, survivorship clauses are normally unnecessary for tax reasons as the beneficiaries of the second estate would in any case be entitled to 100% quick succession relief should one spouse die within 12 months of the other.
If immoveable property in a foreign country is left to a spouse or civil partner, the exemption may not apply in full if the laws of that country require part of the property to be devolved to other persons, regardless of either the terms of the will or UK intestacy law. There may also be a foreign will that takes precedence. The same could also apply to moveable property anywhere in the world, even the UK, if the deceased was domiciled outside the UK. In such cases, the spouse exemption would be restricted to the amount actually inherited by the spouse or civil partner after all other claims are settled.
Joint or Partnership Property
It is often the case that property is left to a spouse (or civil partner) in a will but it later transpires that other people are entitled to inherit the property instead and their claim takes precedence. Examples include property held as joint tenants (where neither party holds a defined share and the joint owner therefore automatically becomes the sole owner) and partnership property which goes to the other partners under the terms of a partnership agreement. In such cases, the spouse exemption will not apply and assets not passing to the spouse may be subject to IHT.