An escape from Inheritance Tax nobody wants

November 2, 2017

Ever heard the phrase there’s nothing certain in life but death and taxes? Well, there is an exception where inheritance tax (IHT) is concerned, but the catch is you both have to die at the same time!

 

Dying together

 

In England and Wales the law provides that where two or more people die and it’s unclear who died first, they are normally presumed to have died in order of seniority. That means therefore that the younger person is deemed to have survived the elder, Law of Property Act 1925 (LPA 1925) s184. This is more commonly known as the ‘commerientes’ rule.

 

Inheritance Tax and quick succession deaths

 

As far as IHT is concerned, deaths in quick succession can result in double IHT charges, not to mention the double cost of probate. In order to mitigate a double tax hit Wills often contain a survivorship clause that says something like, “I give to X only if they survive me by 30 days”. That means that if the person you’re gifting to dies within those 30 days then the gift fails and goes to the next person named in the Will. By doing this you avoid two charges to IHT in quick succession. In the case of a married or civil partnership couple where the surviving spouse dies within the survivorship period, the gift skips the second to die and it might go to the children instead.

 

With the introduction of the transferable nil rate band (the surviving spouse’s estate is now entitled to receive the nil rate band of the first death to add to their own, meaning a combined nil rate band of £650,000 in the current tax year) survivorship clauses can sometimes result in a higher impact on the IHT payable. For example, if the survivorship clause is invoked, the gift skips the spouse and goes to the next in line to inherit.

 

The transferable nil rate band however is only available to surviving spouses. In the case of simultaneous deaths therefore, as the s184 of the LPA 1925 determines that the elder died first, the nil rate band of the first to die evaporates due to the survivorship clause.

 

Solution

 

But don’t worry, there is an upside to this Mills and Boon double death saga in the Inheritance Tax Act 1984. Sections 4(2), and 54 (4) provide that where two or more persons die and it cannot be known who survived the other, they are deemed to have died at the same instant.

 

Ok so what does all that mean? Well, the sections in the above two Acts have the effect that the inclusion of a survivorship clause in a Will could result in a loss of the double nil rate band allowance. The way to avoid that happening is to exclude any survivorship clause in the event of a simultaneous death. In doing so, in the case of two spouses, the entire estate of the first to die skips the second spouse and passes to the next beneficiary completely free of IHT.

 

If your Will includes a survivorship clause, give me a call for some advice on what you need to do.

 

This information provided in this article is not intended to constitute legal advice and each relationship breakdown requires careful consideration in our view by a fully qualified Solicitor before decisions are made and before you embark on a certain course of action.

 

Nino Cuffaro

Penn Chambers Solicitors
0207 183 1485

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