The death of the second parent is an emotionally challenging time, and navigating inheritance tax (IHT) can add financial stress to families. Understanding what happens to inheritance tax when the second parent dies is crucial to avoid unexpected bills and ensure your parents’ estate is passed on smoothly. This guide explains the rules, exemptions, and strategies to minimise IHT liabilities in the UK.
Why Inheritance Tax When Second Parent Dies Matters
Inheritance tax is charged at 40% on estates valued above the tax-free threshold (£325,000 as of 2023). However, when the second parent dies, their estate may benefit from combined allowances and exemptions from both parents. Failing to plan ahead could mean losing out on valuable tax reliefs or leaving your family with a hefty bill.
According to HMRC, only 4% of estates paid IHT in 2022/23, but rising property prices mean more families are being caught in the net. Let’s break down how IHT applies when the second parent passes away.
Key IHT Rules When the Second Parent Dies
1. The Nil-Rate Band (NRB)
Every individual has a £325,000 IHT-free allowance (the nil-rate band). Unused NRB from the first parent’s estate can transfer to the surviving spouse/civil partner.
Example:
- Parent A dies in 2010, leaving everything to Parent B. Parent A’s NRB (£325,000) is unused.
- When Parent B dies in 2023, their estate can use both NRBs: £325,000 x 2 = £650,000 tax-free.
2. The Residence Nil-Rate Band (RNRB)
An additional £175,000 (2023) tax-free allowance applies if the family home is left to direct descendants (children, grandchildren). Like the NRB, unused RNRB can transfer between spouses.
Example:
- Parent A dies in 2018, leaving their share of the home to their child. Their RNRB is fully used.
- When Parent B dies in 2023, their estate can claim Parent B’s RNRB (£175,000) + any unused RNRB from Parent A (if applicable).
Total Tax-Free Threshold for a Couple (2023):
| Allowance | Maximum Combined |
|---|---|
| Nil-Rate Band (NRB) | £650,000 |
| Residence NRB (RNRB) | £350,000 |
| Total | £1,000,000 |
How Inheritance Tax is Calculated When the Second Parent Dies
The estate’s IHT liability is calculated as:
Taxable Estate = (Total Estate Value) – (Combined NRB + RNRB)
IHT Due = 40% of Taxable Estate
Scenario Example:
- Parent B’s estate is worth £1.2 million, including a £500,000 home left to their child.
- Combined NRB: £650,000
- Combined RNRB: £350,000
- Tax-Free Total: £1,000,000
- Taxable Amount: £1,200,000 – £1,000,000 = £200,000
- IHT Due: 40% of £200,000 = £80,000
Exemptions That Reduce IHT Liability
1. Spousal Exemption
Assets passed between spouses/civil partners are IHT-free, regardless of value. This exemption applies when the first parent dies, delaying IHT until the second parent’s death.
2. Gifts and Annual Exemptions
- £3,000/year gift allowance (can be carried forward 1 year).
- Small gifts up to £250/person/year.
- Wedding/civil partnership gifts (£1,000–£5,000 depending on relationship).
3. Charity Donations
Gifts to charity are exempt, and leaving 10%+ of the estate to charity reduces the IHT rate to 36%.
4. Business and Agricultural Relief
Assets like farms or family businesses may qualify for 50–100% IHT relief.
Steps to Minimise Inheritance Tax When the Second Parent Dies
1. Use Both Parents’ Allowances
Ensure the executors claim:
- Any unused NRB and RNRB from the first parent.
- Documentation (e.g., death certificates, wills) is needed to prove transferable allowances.
2. Downsize to Secure the RNRB
Even if the parents sell their home, the RNRB may still apply if assets of equivalent value are left to descendants.
3. Make Gifts Early
Gifts made 7+ years before death are IHT-free (taper relief applies for 3–7 years).
Taper Relief Example:
| Years Before Death | Tax Rate |
|---|---|
| 0–3 | 40% |
| 3–4 | 32% |
| 4–5 | 24% |
| 5–6 | 16% |
| 6–7 | 8% |
| 7+ | 0% |
4. Set Up Trusts
Assets in trusts may reduce the taxable estate, but expert advice is essential due to complex rules.
5. Take Out Life Insurance
A life insurance policy written in trust can cover the IHT bill, ensuring heirs don’t need to sell assets.
Common Pitfalls to Avoid
- Assuming Everything Goes to the Spouse Tax-Free
While spousal exemption defers IHT, the combined estate may face a larger bill when the second parent dies. - Overlooking RNRB Eligibility
The home must be left to direct descendants. Stepchildren and foster children qualify; siblings do not. - Missing Deadlines
IHT must be paid within 6 months of death (interest applies afterward).
FAQs: Inheritance Tax When Second Parent Dies
Q: What if the estate is worth less than £1 million?
A: If the combined estate is below the NRB + RNRB (£1 million), no IHT is due.
Q: Can unmarried partners transfer allowances?
A: No—only spouses/civil partners can transfer NRB and RNRB.
Q: How is IHT paid if the estate isn’t cash-rich?
A: Families often sell assets (e.g., property) or use a loan against the estate.
Q: Is there IHT on jointly owned assets?
A: Jointly owned property passes automatically to the survivor but forms part of the estate for IHT.
Final Steps for Executors
- Value the Estate: Include property, savings, investments, and gifts made within 7 years.
- Submit IHT Forms:
- IHT205 if the estate is below the threshold.
- IHT400 if IHT is due.
- Pay IHT: Usually required before probate is granted.
Use the GOV.UK IHT calculator to estimate liabilities.
Final Thoughts
Dealing with inheritance tax when the second parent dies requires careful planning, but leveraging allowances and exemptions can significantly reduce the burden. By understanding transferable thresholds, making strategic gifts, and seeking professional advice, you can protect your family’s legacy. For tailored guidance, consult a Chartered Tax Advisor or use HMRC’s resources.
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