Can I pass assets to my spouse without incurring Inheritance Tax?

If I leave an estate of £500,000, do I need to leave £175,000 to my wife in order that Inheritance Tax is not paid? I must be misinterpreting this as it implies that £325,000 will have to be left to someone else or a charity. Alternatively, do I interpret the sentence as my wife will receive all assets (£500,000) without paying Inheritance Tax but she will have to pay it if her estate is over £325,000 when she dies?

First, an apology, our Inheritance Tax (IHT) guide was evidently not as clear as it should be. We have adjusted it and thank you for highlighting the problem. You can check it out here.

On your question, anything you leave to your wife is free from IHT. That means your family home, remaining pensions, cars, artworks and anything else can be passed to her with no tax to pay.

However, if you leave nothing to your wife and everything to, say, a child, they would pay 40% on everything over the nil rate band (£325,000) – so £175,000 x 40% = £70,000. The exception is if you are leaving your main home to ‘direct descendants’ – in practice, children and grandchildren – you will get an additional £175,000 added to your nil rate band.

If you leave everything to your wife and therefore don’t use any of your nil rate bands, they will be available for her to use when she dies. So she would be able to pass on £650,000 free from IHT, or £1,000,000 if it includes the family home.

That said, IHT is fiendishly complex and there are a range of considerations when deciding the best way to allocate your estate. It may also change in the upcoming budget, which could bring in a new set of rules. It can be worth bringing in the services of an IHT expert to help minimise the amount your heirs will pay over the long-term. Any cost may be worth it in terms of tax savings.