Navigating estate planning and optimising Inheritance Tax (IHT) arrangements is never simple – the rules are complicated, and family situations are unique. This is all the more so in second marriages, blended families, and families where there are children from a first and second marriage. From making sure assets are fairly distributed to protecting them from the taxman, specialist advice is needed to manage what can be a delicate balancing act.
For individuals who have been widowed previously and are now thinking about getting married again, one of the most important financial considerations is the IHT position.
A Trust sets out intentions clearly and means trustees can make decisions based on changing family circumstances, such as remarriages, births, or financial hardship. A Trust can also tailor distribution, stipulating when and how beneficiaries receive money. This is especially helpful if children or stepchildren are young, financially inexperienced, or vulnerable.
IHT and second marriages
When a married person leaves their estate entirely to their spouse, no IHT is due on the first death because of the spousal exemption. More importantly, the deceased spouse’s unused nil rate band (NRB), currently £325,000, can be transferred to the surviving spouse’s estate on second death. If the residence nil rate band (RNRB) applies (up to £175,000 per person), this can also be transferred, assuming the estate qualifies, and the property is left to direct descendants. That makes a total of £1 million per couple.
But in second marriages, if a widow or widower remarries, they can still benefit from the transferable NRB and RNRB from their first spouse. On their own death, they may also benefit from their new spouse’s NRB, assuming the new partner has also died. However, the maximum transferable nil rate bands available to any one person is capped at one additional NRB and RNRB, even if they have had multiple spouses.
It’s important to know that you cannot claim multiple transfers from different partners, only the higher of the two is available, and if that is the allowance of the first spouse rather than the second, then that is the one to claim. It goes without saying that proper documentation and record-keeping are essential to ensure the first spouse’s unused allowances are preserved for potential future use if they are more advantageous.
IHT, second marriage, plus children
Another issue to consider around second marriages is providing for children, old and new, in blended families. Indeed, one of the most emotionally and legally challenging areas of estate planning can arise when a remarried individual has children from a previous relationship. Without clear instructions, there is a risk a child from a first marriage may not inherit what was intended.
Indeed, when a individual remarries, any existing Wills are automatically revoked (unless expressly made in contemplation of marriage). If no new Will is created, intestacy rules apply, which can unintentionally favour the new spouse and exclude children from a previous marriage entirely – this is called unintentional disinheritance.
To prevent this, individuals may consider leaving their share of assets directly to their children on the first death, particularly when assets are owned as tenants in common, which allows each partner to leave their own portion of property to beneficiaries of their choice.
However, this must be carefully considered. Leaving assets directly to children can reduce the surviving spouse’s financial security. A Trust could be a potential solution.
If a widow or widower remarries, they can still benefit from the transferable NRB and RNRB from their first spouse. On their own death, they may also benefit from their new spouse’s NRB, assuming the new partner has also died. However, the maximum transferable nil rate bands available to any one person is capped at one additional NRB and RNRB, even if they have had multiple spouses.
IHT and Trusts
The Society of Trust and Estate Practitioners (STEP) says that trusts are widely used in second marriages to reduce the likelihood of disinheritance and manage complex family dynamics. STEP’s own guidance confirms that considering this approach is best practice among estate planning professionals.
Trusts may also be preferable to using mutual Wills where the Will is legally binding on the survivor and cannot be changed after the first death. While this might seem like a good solution, they can be inflexible and can lead to disputes, particularly as they do not allow for future changes in family or financial circumstances.
Thus, a solution that may be considered is the use of a ‘Life Interest Trust’. Here the surviving spouse can continue to live in or benefit from the assets during their lifetime, while the capital is ultimately preserved for the children. This balances both sets of interests and offers more control.
One advantage of this approach is that, for Capital Gains Tax (CGT) purposes, the trust assets are treated as part of the surviving spouse’s estate. When the spouse dies, the assets receive a CGT uplift to market value, so the children typically don’t face a CGT bill for any increase in value during the spouse’s lifetime, which could otherwise be significant if the property is held for many years.
Another advantage is that a Trust can set out intentions clearly and means trustees can make decisions based on changing family circumstances, such as remarriages, births, or financial hardship. A Trust can also tailor distribution, stipulating when and how beneficiaries receive money. This is especially helpful if children or stepchildren are young, financially inexperienced, or vulnerable.
However, trusts can be complex and are not without issues and care is therefore needed. Creating a ‘Lifetime Trust’ (one set up while you’re alive) can help remove assets from your estate for Inheritance Tax (IHT) purposes, but only up to the nil rate band (currently £325,000). Transfers above this amount are known as chargeable lifetime transfers and will trigger an immediate 20% IHT charge on the excess.
Another common trap arises when someone places their main residence into Trust but continues living there rent-free. HMRC may treat this as a gift with reservation of benefit (GWR), meaning the asset is still counted in the estate for IHT. It can also be caught under pre-owned asset tax (POAT) rules, resulting in an annual income tax charge.
The pros and cons of Trusts
Ultimately, everyone’s family and financial situation is different, and so exploring the right strategies to manage and mitigate these correctly really requires tailored individual advice.
Trusts may be a way to provide clarity, fairness and peace of mind across generations. If used correctly, they protect your intentions, reduce family conflict, and help ensure that your legacy reaches the people you intended it to benefit.
Nevertheless, trusts must be correctly structured and worded to avoid unintended tax charges. In addition, nil rate band transfers need to be properly recorded and claimed. In all cases, regular reviews of your Will, ownership structures, and asset distribution are essential, especially following a major life event like marriage, bereavement, or the birth of a child.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
If this article has raised questions for you, feel free to get in touch!
Written by Abigail Thompson, an Independent Financial Adviser at Flying Colours