How to Avoid Inheritance Tax When Second Parent Dies

When the second parent in a couple passes away, their estate is often passed to the children. Depending on the value of the estate, this can trigger a substantial Inheritance Tax (IHT) bill. However, with careful planning, there are several ways to reduce or eliminate this liability and ensure more of the estate is passed on to the next generation.

This guide covers how Inheritance Tax works after the second death, the allowances available, and practical strategies families can use to reduce or avoid paying unnecessary tax.

Can You Avoid Inheritance Tax?

Inheritance Tax can’t always be avoided, but it can often be reduced through exemptions, reliefs, and forward planning. The key is to understand the thresholds and rules that apply, and to act early where possible.

What Happens When the First Parent Dies?

When the first parent dies, any assets passed to their spouse or civil partner are exempt from Inheritance Tax. This is known as the spouse exemption. It means no tax is usually paid at this stage, regardless of the estate’s value.

If the first spouse doesn't use their full IHT allowance (called the nil-rate band), the unused portion can be transferred to the surviving spouse. This creates a combined tax-free threshold when the second parent dies.

Current Inheritance Tax Thresholds

As of the 2024–25 tax year:

• The nil-rate band is £325,000 per person

• The residence nil-rate band is £175,000 per person, if a home is left to direct descendants

• This gives a potential combined allowance of £1 million for married couples or civil partners passing on their home to children or grandchildren

Any part of the estate above the tax-free threshold is taxed at 40 percent.

Ways to Reduce Inheritance Tax After Second Death

1. Make a Will

Having a valid will in place ensures that your estate is distributed according to your wishes and can help use your allowances efficiently. Without a will, your estate follows intestacy rules, which may not be the most tax-efficient outcome.

A will can also be used to:

• Set up trusts

• Make gifts to charity

• Allocate assets between different beneficiaries in a tax-efficient way

2. Use the Spouse Exemption and Transfer of Allowances

As mentioned, assets passed between spouses are IHT-free. On second death, the estate can use both partners' allowances, potentially sheltering up to £1 million from IHT.

This includes:

• £325,000 nil-rate band from each parent

• £175,000 residence nil-rate band from each parent, if the home is passed to direct descendants

Make sure that HMRC is informed of the first death and that unused allowances are claimed when the second parent passes.

3. Use Trusts to Reduce Inheritance Tax

Placing assets into a trust during your lifetime or via your will can help remove them from your estate, reducing its value for IHT purposes.

Common types of trusts include:

• Discretionary trusts

• Interest in possession trusts

• Bare trusts

Trusts must be set up carefully and in line with current tax rules. They don’t eliminate IHT altogether but can offer control and potential long-term savings.

4. Make Lifetime Gifts

You can give away assets during your lifetime to reduce the size of your estate. If you live for seven years after making a gift, it usually becomes exempt from IHT. This is known as the seven-year rule.

However, if you die within seven years, taper relief may reduce the tax payable depending on how long ago the gift was made.

There are also tax-free gift allowances each year, including:

• £3,000 annual exemption per person

• Unlimited small gifts under £250 per person

• Wedding gifts up to £5,000 for a child

Gifting is most effective when started early and done consistently.

5. Leave Money to Charity

Anything left to a registered UK charity is exempt from Inheritance Tax. If you leave at least 10 percent of your estate to charity, the rest of your estate may be taxed at 36 percent instead of 40 percent.

This can be a valuable way to reduce the tax burden while supporting causes that matter to your family.

6. Use Life Insurance to Cover the IHT Bill

Some families take out a whole of life insurance policy to cover the anticipated tax bill when the second parent dies. The payout is used to pay HMRC, ensuring the estate doesn't have to be broken up or sold to raise funds.

To be effective, the policy must be written in trust, otherwise the payout will form part of the estate and may itself be taxed.

7. Consider Equity Release

For some older homeowners, releasing equity from their property during their lifetime can reduce the estate’s value, which may in turn lower the IHT bill. However, this strategy is complex and must be considered carefully, as it may affect entitlement to means-tested benefits and reduce the value passed on.

8. Other Reliefs and Exemptions

Some assets may qualify for Business Relief or Agricultural Relief, allowing them to be passed on with up to 100 percent exemption. These reliefs apply to:

• Family businesses

• Farms and agricultural property

• Shares in certain unlisted companies

These are powerful tools for keeping family wealth intact but must meet specific conditions.

Final Thoughts

When the second parent dies, Inheritance Tax can significantly reduce what is passed on to children or grandchildren. But with early planning, it is often possible to reduce or avoid IHT altogether through allowances, exemptions, gifts, trusts and insurance.

The most important step is to have a clear plan, make a valid will, and seek professional advice where needed. Getting it right could mean keeping hundreds of thousands of pounds in the family rather than handing it over to the taxman.