The IHT Spouse Exemption: 3 Updates Tax Professionals Need to Know in 2025

This powerful tax relief allows assets to pass between spouses or civil partners completely free from inheritance tax. It’s important to know for professionals working in tax, wealth management, accountancy, and law, and how it fits into the broader picture of recent and upcoming changes to Capital Gains Tax (CGT) and Inheritance Tax.

What is the IHT Spouse Exemption HMRC Law?

The IHT spouse exemption is a tax relief that allows a surviving spouse or civil partner to receive assets from their deceased partner without paying inheritance tax. In simpler terms, it's a free pass that lets wealth transfer between married couples or civil partners without HMRC taking a cut. This exemption is not available to cohabiting couples who are not legally married or in a civil partnership. It also has limitations when one spouse is not UK-domiciled, which we’ll discuss in more detail later.

The exemption is unlimited and applies automatically on death.

But why does this matter? Well, with the standard inheritance tax rate sitting at a hefty 40% for estates above the threshold, this exemption can save families hundreds of thousands of pounds in tax liabilities.

Here's how it typically works:

When one spouse dies, they can leave their entire estate to their surviving partner completely free of inheritance tax, regardless of the value. This occurs because transfers between spouses and civil partners qualify for a 100% exemption from IHT.

Example: Michael and Sarah have been married for 30 years. Their joint estate is worth £1.2 million. When Michael passes away, he leaves everything to Sarah. Despite their estate being well above the nil-rate band threshold (currently £325,000), Sarah pays absolutely no inheritance tax on the transfer because of the spouse exemption. This preserves the full value of the estate for Sarah's benefit.

Key Conditions (Spouse Exemption IHT Points to Consider)

• The exemption only applies to legal spouses or civil partners.
• The recipient must be UK-domiciled to benefit from unlimited relief.
• If the surviving spouse is non-domiciled, the exemption is capped at the nil-rate band (£325,000).

A non-domiciled spouse may elect to be treated as UK-domiciled for IHT purposes to claim the full exemption, though this brings their worldwide estate within the UK tax net.

Transferable Nil-Rate Band: Double Your Allowance

One of the most valuable aspects of the spouse exemption is the transferable nil-rate band. But what does this actually mean in practice?

Every individual has an IHT nil-rate band (currently £325,000) which allows a certain amount of their estate to pass tax-free to beneficiaries. When assets pass between spouses, the unused portion of the deceased spouse's nil-rate band can be transferred to the surviving spouse.

In plain English? The surviving spouse could potentially have a nil-rate band of up to £650,000 when they eventually pass away.

But wait, there's more!

Since 2017, there's also been the residence nil-rate band (currently £175,000), which applies when a home is passed to direct descendants. This too can be transferred between spouses, potentially giving the surviving spouse up to £350,000 in additional allowances.

Example: John and Emma own a home worth £500,000 and have additional assets worth £600,000. When John dies, he leaves everything to Emma, using the spouse exemption. No IHT is due at this stage. Years later, when Emma passes away, leaving everything to their children, her estate can benefit from:

• Her own nil-rate band (£325,000)
• John's unused nil-rate band (another £325,000)
• Her residence nil-rate band (£175,000)
• John's unused residence nil-rate band (another £175,000)

That's a total of £1 million in tax-free allowances! On their £1.1 million estate, only £100,000 would be subject to inheritance tax, resulting in a tax bill of just £40,000 instead of what could have been £440,000 without proper planning.

The IHT Spouse Exemption Non-UK Domiciled Limitation: International Considerations

Now here's where things get a bit tricky. If your client's spouse is not domiciled in the UK, the spouse exemption is not unlimited. Instead, there's a cap on how much can be transferred tax-free.

Before 2013, this cap was set at a measly £55,000, which created significant issues for international couples. However, following changes introduced in 2013, this limit was increased to match the nil-rate band (currently £325,000).

Non-UK domiciled spouses now have two options:

1. Accept the limited spouse exemption of £325,000
2. Elect to be treated as UK-domiciled for IHT purposes

The second option allows for unlimited spousal transfers but means the non-UK domiciled spouse's worldwide assets will be subject to UK inheritance tax going forward. This election is irrevocable while the individual remains a UK resident, but can fall away after they've been non-resident for four consecutive tax years.

This is exactly the kind of complex scenario where professional advice becomes invaluable for clients.

Recent Changes and Updates for 2025

The landscape of inheritance tax is changing, and staying current is crucial for tax professionals. Recent years have seen several changes that impact the spouse exemption and related allowances.

1. Threshold Freeze and Fiscal Drag

The nil-rate band (£325,000) and residence nil-rate band (£175,000) have been frozen since 2020 and are scheduled to remain so until at least April 2028.

During this time, property prices and asset values have continued to rise, increasing the number of estates that exceed the threshold, an effect known as fiscal drag. According to HMRC data, the government collected £7.5 billion in IHT receipts in 2023–24, a record high.

In this context, the spouse exemption plays a central role in mitigating exposure to inheritance tax and preserving intergenerational wealth.

2. Increased Scrutiny and Reporting Obligations

Since 2022, more estates have been required to complete IHT forms, even when no tax is due. The administrative burden is growing, and advisers need to ensure proper documentation of reliefs and exemptions, including the spouse exemption.

Professionals need to accurately identify this and claim relief has become a differentiating skill.

3. Future Political Uncertainty

The government could reform or restrict IHT reliefs, including the spouse exemption. While there are no confirmed proposals at this stage, some political parties and think tanks have floated the idea of:

• Abolishing the CGT uplift on death
• Reducing or removing the residence nil-rate band
• Introducing lifetime gifts tracking beyond the current 7-year window

Planning Opportunities with the Spouse Exemption

So, how can your clients make the most of the spouse exemption? Here are some strategic considerations.

Wills and Estate Planning

It's crucial that clients have properly drafted wills that maximise the benefit of the spouse exemption. While many assume leaving everything to their spouse is always the best approach, this isn't necessarily true.

Sometimes, it may be advantageous to leave some assets to other beneficiaries up to the value of the nil-rate band. This approach, often called a "nil-rate band discretionary trust," can provide flexibility and potential tax savings, especially for larger estates.

Lifetime Gifts

The IHT spouse exemption applies not just to transfers on death but also to lifetime gifts. This means spouses can freely transfer assets between them during their lifetimes without triggering tax charges.
This can be particularly useful for balancing estates or transferring assets to the spouse who might make better use of other tax allowances, such as the capital gains tax annual exemption.

Business Property and Agricultural Relief

For clients with business or agricultural assets, combining spouse exemption planning with Business Property Relief or Agricultural Property Relief can create powerful tax-saving opportunities.

International Considerations

For clients with international connections, the interplay between the UK spouse exemption and overseas inheritance tax regimes requires careful navigation. Different countries have different rules about spousal transfers, and double taxation can become an issue without proper planning.

Looking Ahead: Potential Future Changes

What changes might be on the horizon for the IHT spouse exemption and related areas? While nothing is certain until officially announced, several areas are being discussed:

1. Potential Reform of Trust Taxation: The taxation of trusts often interacts with spouse exemption planning, and reforms could impact optimal strategies.
2. Further Digitalisation: HMRC continues to move toward digital services, which may simplify the process of claiming spouse exemptions and transferred allowances.
3. Possible Review of Domicile Rules: The special rules for non-UK domiciled spouses could be subject to review as part of broader tax reforms.
4. Alignment with Modern Families: As family structures evolve, there may be pressure to extend similar benefits to other family arrangements beyond spouses and civil partners.

Common Pitfalls to Avoid

Even with the seeming simplicity of the spouse exemption, there are several common mistakes that clients should avoid:

1. Assuming No Planning is Needed: Just because the spouse exemption exists doesn't mean no planning is required. Strategic use of allowances and exemptions can still save significant tax.
2. Overlooking the Residence Nil-Rate Band: Failure to meet the conditions for the residence nil-rate band can cost heirs up to £140,000 in unnecessary tax.
3. Non-Domicile Complications: International couples often miss the implications and options available for non-UK domiciled spouses.
4. Not Keeping Records: Poor record-keeping can make it difficult to claim the transferred nil-rate band when the second spouse dies.
5. Failing to Review Arrangements: Tax rules change, and personal circumstances evolve. Regular reviews of estate planning are essential.

Why You Need to Look Ahead: Expert Guidance Matters

So, what is spouse exemption for IHT?

It's a powerful tool in estate planning, potentially saving families hundreds of thousands of pounds in tax. However, as we've seen, optimising its use alongside other reliefs and allowances requires knowledge, foresight, and regular reviews.

However, the complexity of inheritance tax planning means that even small oversights can lead to significant tax liabilities.

Are you confident in your ability to navigate these rules for your clients? Could you benefit from deepening your knowledge of inheritance tax planning strategies?

Our comprehensive course, Capital Gains & Inheritance Tax: Recent & Planned Changes, covers everything you need to know about current IHT rules, spouse exemptions, and effective planning strategies. In just one focused session, you'll gain insights that can save your clients millions in unnecessary taxes.

Your clients trust you with their financial futures—make sure you're equipped with the most up-to-date knowledge to protect their legacy and add real value to your professional services.

FAQ

When did the IHT spouse exemption start?

The concept of spouse exemption in inheritance tax originated in 1972 under the Finance Act 1972, when it was introduced as part of Estate Duty reforms. However, it was limited in scope at that time — the exemption only applied up to a certain amount (initially £15,000).